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Simple English definitions for legal terms
loss carryforward
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A quick definition of loss carryforward:
Loss carryforward: When a business or individual has more expenses than income in a given year, they may have a net operating loss. This loss can be carried forward to future years and used as a deduction on their income taxes. This is called a loss carryforward, and it can be used for up to five years after the initial loss occurred. It's like saving a coupon for a discount on your taxes in the future.
A more thorough explanation:
Loss carryforward is a tax deduction that allows a business to use its losses from one year to reduce its taxable income in future years. This deduction cannot be taken entirely in a given period but may be taken in a later period, usually the next five years.
For example, if a business has a net operating loss of $10,000 in one year and only $5,000 of that loss can be used to offset its taxable income for that year, the remaining $5,000 can be carried forward to the next year. In the next year, the business can use the $5,000 loss carryforward to reduce its taxable income and lower its tax bill.
Loss carryforward is a useful tool for businesses that experience losses in one year but expect to make a profit in future years. It allows them to offset their future taxable income and reduce their tax liability.