Loss Carry-Back


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Loss Carry-Back (Carry-Forward)

A tax provision that allows operating losses to be used as a tax shield to reduce taxable income in prior and future years. Losses can be carried backward for up to three years and forward for up to 15 years under current tax codes.

Carryback

In accounting, a way for a company to reduce its tax liability by applying a net operating loss to previous years in which it made a profit. If a company deducts more than its net income in a given tax year, it may take the difference between the deduction and the net income (a negative number) and apply it as a deduction on taxable income for the previous five years. For example, if a company makes $1,000,000 in one year, and loses $500,000 the following year, it may only be liable for a $500,000 profit on the year it makes a profit. That is, it may receive a tax refund on part of what it paid for the profitable year. See also: Future Income Tax.
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The Gillard Government's loss carry-back initiative allows businesses in a loss position to use their legitimate tax deductions to refund tax paid in previous years.
Treasury estimates that loss carry-back will assist nearly 110,000 companies in its first four years, including one in six manufacturing companies and almost 100,000 small businesses.
Loss carry-back had widespread support at the Government's successful Tax Forum in 2011 and was developed in close consultation with business representatives and tax experts through the Business Tax Working Group.
Under SSAP 10R, the admissibility test is increased from 10% to 15% of adjusted surplus, and the admissibility test increases the loss carry-back allowance from one year to three.
Generally speaking, gross tax assets shall be admitted in an amount equal to the sum of (1) federal income taxes paid in prior years that can be recovered through loss carry-backs for existing temporary differences that reverse by the end of the subsequent calendar year; (2) the lesser of (a) the amount of gross deferred tax assets expected to be realized within one year of the balance sheet date, or (b) 10% of statutory capital and surplus as required to be shown on the statutory balance sheet of the entity for its most recently filed statement.
The extension of the loss carry-back rules will help some smaller companies.
Gross deferred tax assets are admitted to an amount equal to the sum of federal income taxes paid in prior years that can be recovered through loss carry-backs for existing temporary differences that reverse by the end of the subsequent calendar year, and the amount of gross deferred tax assets expected to be realized with one year of the balance sheet date, or 10% of statutory capital.
The airline, which filed for bankruptcy on 9 December, included the expected recovery from tax overpayments plus interest and net operating loss carry-backs as key assets to help fund its restructuring.
Federal income taxes paid in prior years recoverable through loss carry-backs for existing temporary differences that reverse by the end of the subsequent calendar year.
This article will focus on tax strategies to employ, taxable income computations, deductible expenses, capital gains and losses, operating loss carry-backs and carry forwards, pension plans, tax credits, administrative matters and S corporations.
170(b)(2), is that the deduction for any tax year is limited to 10% of taxable income determined without regard to charitable contributions, special deductions (dividends received deduction, etc.) and net operating and capital loss carry-backs. Charitable contributions in any year are available as a carry-forward to the five successive taxable years.