Published on: January 30, 2020 Last modified: April 28, 2020

Tax Loss Carryforward Explained

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    What if a major tax loss didn’t have to be the end of your business?

    It’s easy to see big losses as a threat to your company’s success. But with tax loss carryforward, your business can create a better and more profitable future for itself.

    Wondering what tax loss carryover is and how you can take advantage of it? Keep reading to discover the answer.

    Tax Loss by Any Other Name

    Tax Law loss carryover

    To understand tax loss carryforward, you must first understand tax loss. This is a simple concept, but it can be confusing because it is known by multiple names.

    For example, this is also known as Net Operating Loss. By any other name, though, such a loss is referring to the same thing.

    It’s simple: if your business expense deductions were actually greater than your income for the year, the business has experienced tax loss. Such tax losses must come from the typical operations of your business.

    Tax Losses: Pros and Cons

    Tax Law loss carryover

    At first glance, the notion of a tax loss may seem to be exclusively negative. In fact, it’s got “loss” right there in the title!

    In certain circumstances, though, losses (particularly small losses) may be favorable for your business. For example, short-term losses can help to offset short-term capital gains.

    Such losses can help to lower your tax liability for the year.

    However, tax losses (especially larger losses) may prevent the future operation of your business. 

    That is why tax loss carryforward can be highly crucial for your company.

    What Is Tax Loss Carryforward?

    Tax Law loss carryover

    Tax-loss carryforward is relatively simple to understand. In fact, the meaning is entirely contained within the name!

    This method lets you carry a tax loss from one year into the next (presumably profitable) year. 

    In this way, tax losses do not have to threaten your entire business. Instead, you can absorb the occasional lousy year with more successful future years and keep your business afloat.

    Who Can Claim Tax Loss Carryforward?

    taking a look at all the options

    Let’s say that you’re interested in the tax loss carryforward. That brings up an obvious question: who, exactly, can take advantage of this benefit?

    One interesting limitation of the loss carryover is that it is permitted for business owners but not directly for businesses.

    Because of that, the carryover benefit is limited to passthrough businesses. This includes single-member LLCs and sole proprietorships.

    If you are a qualifying business owner, you can use this benefit in the following scenarios. Businesses facing a net operating loss or capital loss over gains may take advantage of the loss carryover.

    And businesses that sold or exchanged qualifying business stocks may also receive this benefit.

    Interestingly, individuals can take advantage of carryforward in some exciting ways.

    For example, someone who paid too much towards a state’s 529 plan can carry that amount forward to subsequent years.

    What's the Catch?

    Tax Law loss carryover

    Your inner cynic may already be shaking its head. “What’s the catch?” In this case, there are certain limits to how much of your future income can impact your tax loss.

    For any tax losses after 2017, the amount you carryforward is limited to 80% of your income for the following year. It is important to understand how this will affect both your current and future taxes.

    If you are dealing with tax losses from before 2017, you cannot carry the losses forward past 20 years. However, for any losses after 2017, you can move them forward indefinitely into the future.

    To help you understand and complete this complicated paperwork, it’s always good to have a tax professional in your corner. 

    How to Get Started

    Tax Law loss carryover

    Interested in getting the tax loss carryover process started? There are actually several steps you must complete to get this ball rolling.

    The obvious first step is to complete your taxes for the year. At this point, you should also verify that you have the type of business that qualifies for the tax loss carryforward.

    The next step is to verify that you had a net operating loss for the year. Without such a loss, the loss carryover is entirely unnecessary.

    If you did experience a net loss, it’s time to do a bit of math. Determine how much your losses exceeded your profits for the year. Next, calculate how the 80% limit will impact your finances with a tax loss carryover.

    Should you still have a loss after calculating for the next year, you may be able to carry forward what is owed into future years. We recommend having a professional double check your calculations at this point.

    Importance of Recordkeeping

    Tax Law loss carryover

    Once you become a business owner, you realize exactly how complicated your taxes can get. That’s why it is so essential for you to keep comprehensive records.

    The primary importance of these records is quite clear. They will help you to quickly and accurately complete your taxes.

    And the less time you must devote to business taxes, the more time you can devote to the business itself.

    In the long run, though, these records become even more critical. They are a way to protect your business interests in the event of an audit. And if you should hire any tax professionals, the records will help them maximize the benefits for you and your company.

    Find out more about Tax Loss Carryover Today!

    Talk to a Tax Attorney

    Hiring a Professional: Get It Right the First Time

    Tax Law loss carryover

    It’s always tempting to fill out your taxes. It seems like an excellent way to save time and harness the same “take charge” attitude that led you to start your own business.

    However, even small errors can severely impact the future of your business. Instead of saving money, mistakes, and miscalculations can lead to major liability and debt.

    It’s worth hiring a professional. This is your chance to get everything right while protecting your business against future threats, such as an audit.

    Tax Loss Carryover: The Next Step

    Now you know how a tax loss carryover can benefit your business. But do you know who can help you take advantage of this?

    We specialize in every aspect of tax law. To see how we can help you file for tax loss carryforward, contact us today!

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