DEFINITION of 'Loss Carryback'

Loss carryback is an accounting term that describes a situation in which a business experiences a net operating loss and chooses to apply that loss to a prior year's tax return. This results in a lower tax bill for the year to which this "carried back" loss has been applied because it reduces the tax liabilities for that previous year. The loss carryback can generate a tax refund for the business for that previous year because of this newly reduced tax liability. After the carried back loss is applied, it will be as though the business overpaid its taxes for that year. Typically, losses can only be carried back two years prior to the year in which the net operating loss occurred. Special circumstances allow for a three-year loss carryback

BREAKING DOWN 'Loss Carryback'

Loss carrybacks are similar to loss carryforwards, except companies apply their net operating losses to preceding rather than subsequent years' incomes. Unless certain circumstances are present, a loss carryback can only be applied to the two years preceding the year the net operating loss occurred.

Example of Loss Carryback

For instance, if a company were to record a net operating loss in its fifth year of business, the company could apply a loss carryback to year three of its business. If the loss carryback completely offset the entire tax liability experienced by the business in year three, then the remaining loss could be applied to year four. If there was still a loss amount left over after eliminating the tax liability of year four, the additional loss amount could then be applied to operating year six, seven, and so forth until the amount of the loss was completely used. While loss carrybacks can typically only go back two years, a loss carryforward can extend for up to 20 years after the year the net operating loss occurred.

A business can choose how to apply a net operating loss when such a loss occurs. It can choose to carry the loss back, or it can choose to carry it forward. A business may choose to carry the loss forward if it expects increased tax liability in the future. However, once a choice has been elected to carry the loss back or forward, the action cannot be reversed.

  1. Form 1045: Application For Tentative ...

    Form 1045 is a tax form used to apply for a tentative refund.
  2. Capital Loss Carryover

    The net amount of capital losses that aren't deductible for the ...
  3. Net Loss

    The result that occurs when expenses exceed the income or total ...
  4. Capital Gains Tax

    A capital gains tax is a tax for capital gains incurred by individuals ...
  5. Losses and Loss-Adjustment Expense

    Losses and loss-adjustment expense is the portion of an insurance ...
  6. Loss Reserve

    Loss reserve is an estimate of an insurer’s liability from future ...
Related Articles
  1. Financial Advisor

    Top Tips for Deducting Stock Losses

    Investors who know the rules can turn their losing picks into tax savings. Here's how to deduct your stock losses.
  2. Investing

    7 Year-End Tax Planning Strategies

    Do you have a capital loss that could be booked and used to offset future tax liabilities? If so, it may be time to sell.
  3. Tech

    Using Tax-Loss Harvesting to Keep Your Gains

    Harvesting tax losses is a key skill that investors can use to keep more of their money in their pockets the next time they file taxes.
  4. Trading

    The art of cutting your losses

    Taking corrective action before your losses worsen is always a good strategy. Find out how to keep your capital losses small and let your winners run.
  5. Taxes

    How Are Futures & Options Taxed?

    We present a basic introduction to the US tax processes of futures and options.
  6. Investing

    Vanguard Target Retirement 2050 Fund Performance Case Study (VFIFX)

    Learn about Vanguard Target Retirement 2050 Fund including an overview, performance analysis and breakdown of fund price trends over the past five years.
  7. Investing

    Banks Helped By Lower Loan Loss Provisions

    Many banks saw improved credit quality in the first quarter of 2011 leading to lower loan loss provisions.
  8. Taxes

    Year-End Tax Planning That Will Boost Your Returns

    Year-end tax planning is crucial to take advantage of strategies to maximize after-tax returns on your investments.
  9. Investing

    Protect Yourself Against Powerful Financial Losses

    Financial losses are both emotionally and mathematically more powerful than gains.
  10. Investing

    Harvest Your Tax Losses Before Year-End

    You could have some losses in your taxable accounts that you can harvest for a tax deduction.
Hot Definitions
  1. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  2. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  3. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  4. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  5. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  6. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
Trading Center