Loss Carryback - Explained
What is a Loss Carryback?
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Table of ContentsWhat is Loss Carryback?How Does a Net Operating Loss (NOL) Carryback Work?Example of Loss CarrybackAcademic Research on Loss Carryback or Carryforward
What is Loss Carryback?
Loss carryback refers to a situation where a company faces a net operating loss and decides to apply it to the tax returns of the previous year. This leads to a reduced tax bill for the year this loss is carried back to since it lowers the tax liabilities experienced in that year. The net operating loss (NOL) refers to the loss portion in the current year that can be applied to previous tax years or future years. A taxpayer who owns a business incurs this loss.
How Does a Net Operating Loss (NOL) Carryback Work?
When calculating this loss some items are excluded, and they are:
- Net capital loss
- Deductions made for personal exemptions
- Nonbusiness deductions made more than nonbusiness income
Also, some adjustments are excluded like the following:
- The gain resulting from sale or exchange of stock from a qualified small business
- The deduction of domestic production activities
- The deduction of NOL from other tax years
Example of Loss Carryback
Assume a company has NOL of $100,000. The company can carry this loss backwards to counterbalance it with the net operating income in the prior year of $100,000. This means that the company would not have a tax liability since these two amounts would cancel out. The company can, therefore, be refunded the tax it paid on the original income of $100,000 if it has already revoked it.The carryback period allowed for a company or an individual is three years. This enables businesses that experience loss in a certain year to use the loss carryback tool and counterbalance it with the past profitable financial results. The carryback period for small businesses was significantly increased by section 1211 of the American Recovery and Reinvestment Act (2009) to five years for NOLs that were incurred in 2008.