Tax Loss Carryforward

What is a tax loss carryforward?

A tax loss carryforward allows a business to apply losses from one year against taxable income in future years. If your business loses $100,000 this year and earns $150,000 next year, the carryforward offsets the income, reducing next year's taxable income to $50,000. Under current law, net operating losses can be carried forward indefinitely but are limited to 80% of taxable income in any given year.

The 80% limitation explained.

If you have $200,000 in carryforwards and $100,000 in current year income, you can only use $80,000 of the carryforward (80% of $100,000). You still pay tax on $20,000 of income even with losses available. The remaining $120,000 carries forward to future years. This limitation ensures some minimum tax payment in profitable years.

Tracking and protecting carryforwards

Maintain documentation of how losses arose and track carryforward balances annually. Ownership changes can limit carryforward use under Section 382. When selling or bringing in new investors, consult your tax advisor about potential limitations. These carryforwards have real value, and their preservation should factor into transaction planning.