What is a Loss Carryforward?
When a business experiences a net financial loss in a given year, it may be advantageous in some cases, for tax purposes, to claim that loss in future years. This accounting technique is called a loss carryforward, because the tax loss is “carried forward” to a future tax year. Generally accepted accounting practices allow for the loss to carry forward for up to seven years, and in some cases up to 15 years. Using the loss carryforward technique is ethical and legal, and sometimes even necessary, but it must be used wisely. The purpose of the loss carryforward is for a business to reduce its tax liability. For example, if a company experiences a negative net operating income (NOI) in a given year, but then has a positive NOI in one of the next several years, the company can claim the loss in one of the profitable years, thereby reducing the taxes paid on the profits of that year. This technique is especially useful in businesses and sectors that are typically cyclical, such as the tran
