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Simple English definitions for legal terms
carryback
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A quick definition of carryback:
Carryback is a way to reduce the amount of taxes a business owes by revising a previously filed tax return. If a business has a net operating loss in the current year, they can apply that loss to a previous year's tax return to reduce the tax liability for that year. This can result in a refund of previously paid taxes.
A more thorough explanation:
Carryback in tax accounting is the process of revising a previously filed tax return to reduce tax liability by applying current year's losses, deductions, and profits. This helps businesses receive a refund of previously paid taxes.
Example 1: A business incurred a net operating loss of $10,000 in the current year. The business can apply this loss to the previous year's tax return, which had a taxable income of $50,000. The revised tax return will show a taxable income of $40,000, resulting in a reduced tax liability and a refund of previously paid taxes.
Example 2: A self-employed individual had a profitable year and paid $5,000 in estimated taxes. The following year, the individual incurred a loss of $3,000. By carrying back this loss to the previous year's tax return, the individual can reduce their tax liability and receive a refund of the previously paid $5,000.
These examples illustrate how carryback can help businesses and individuals reduce their tax liability and receive refunds of previously paid taxes by applying current year's losses to previous year's tax returns.