Loss Carryforward

Loss Carryforward

In accounting, a way for a company to reduce its tax liability by applying losses to future tax years in which the company makes a profit. That is, carryforward allows companies to apply losses to profits that have not yet occurred and thereby reduce the taxes it pays on those profits. Carryforward is limited to seven years. For example, suppose a company loses $500,000 in Year 1, and then nets $1,000,000 in Year 5. The company may carry forward the losses and only be liable for taxes on $500,000 of its profit in Year 5.

Independent contractors who file Schedule C with the IRS are required to use carryforwards, which are useful, as most independent contractors lose money in their first few years of business. Some publicly-traded companies opt not to use it, as appearing to reduce profits may scare off potential investors who do not realize that the profits upon which taxes are paid do not equal the company's actual profits.