Can someone please explain in detail how ‘tax loss carryforwards’ work? Many thanks.
Tax loss carryforwards are an asset that couldn’t be fully realized yet. An example would be capital losses from a personal investment portfolio. Let’s say that you sold a stock you bought for $10,000 for half of the value. So now you have a capital loss (deduction) for $5,000. This can be used to offset other capital gains that you have elsewhere in your portfolio or (under current rules) up to $3,000 of the capital loss can be used to offset ordinary income (maybe your salary). So if you didn’t have capital gains to net out with, then you would only use $3,000 of your potential $5,000 deduction. The $2,000 that you can’t use on this years tax return would be carried over to the next year. While it was waiting to be used it would be an asset on a company’s balance sheet as it will be used in the future to offset future income (assuming they have it).
Capital Asset- Any asset held for investment (in case of a company or an individual) or for personal use (for an individual). Individual Tax- Only 3k of capital loss per year can offset ordinary income; unused loss is carried forward indefinitely to offset capital gains or ordinary income up to 3k; short term and long-term carryovers retain their character. In corporate tax returns, capital losses can only be used to offset capital gains. They can be carried back 3 yrs and then the remaining capital loss can be carried forward for 5 yrs. All capital losses are carried back or forward as Short Term Capital Losses. Net Operation Loss can be carriedback for 2 years and carried forward for 20 years. However, a company can choose to forego the 2 yrs carryback and just carry forward all the loss for 20 years, until it’s exhausted. If 2 yrs carry back is foregone, then the company cannot avail it later. (this rule is applicable for both individuals and corporations)