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 they pay on those profits. Carryforward is limited to seven years. For example, suppose a company loses $500,000 in year one, then
nets $1,000,000 in year five. The company may carry forward the losses and only be liable for taxes on $500,000 of its profit in year five.
Independent contractors who file
Schedule C with the
IRS are required to use carryforwards, which is useful since 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.