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What's the Difference between a Loss Carry Back and a Loss Carry Forward?


Question: What's the Difference between a Loss Carry Back and a Loss Carry Forward?

A tax loss carry forward is a provision in the Tax Code to allow a business to use a to use a net operating loss in one year to offset a profit in one or more future years. This provision is also called a tax loss carry forward. You can elect to carry forward an NOL up to 20 years.

A tax loss carry back is a similar type of provision, which allows the business to carry a net operating loss back to offset profits in previous years.

How Do I Know Which is Better?
You don't. You know your profits in previous years, but you must estimate (guesstimate, actually) your profits in future years. If taxes are raised in the future, you may be better off taking a tax loss later, rather than going back to try to use it to offset profits in the past. If you think your business has a lot of potential for growth, and profit, over the next 20 years, you might decide to forgo the carryback possibilities and go with the carry forward. But, once you decide on a carry forward, you can't go back and choose a carry back. You should consult your tax advisor and run various scenarios before making a decision.

Recovery Act
Provisions of the ARRA "Recovery Act" allow tax losses to be carried back up to five years, instead of only two years, as has been the law previously.

Small Business Jobs and Credit Act of 2010
The Small Business Jobs and Credit Act includes provisions for extending tax credits back up to five years (previously only a one-year carry back was allowed). The provision applies to small businesses (not publicly traded) that have averaged less than $50 million in gross receipts for the last three years. Examples of the tax credits you can carry back include Work Opportunity Credit, Disabled Access Credit, Empowerment Zone Hiring Credit, and the Employer Provided Child Care Credit.

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