Loss Carryforward

If a business makes a loss for tax purposes, it pays no income tax that year, but the loss itself can still be useful. Carrying it forward means future taxable profits are reduced by the loss before tax is calculated.

For example, a start-up makes tax losses of 300,000 in its first two years. In its third year, it makes taxable profits of 200,000. Using its carried-forward losses, it pays no tax that year and still has 100,000 of losses to use later.

Most countries allow losses to be carried forward, but rules differ. Some limit the number of years, some cap the share of each year's profits that can be offset, and some restrict losses to profits from the same type of business. Some countries also allow losses to be carried back to earlier years, producing a refund of tax already paid.

Loss carryforwards can be lost or restricted if a company changes ownership or stops its original business. In the accounts, they may be recognised as deferred tax assets if future profits are expected.