Under current tax law, a company that incurs a net operating loss (NOL) may carry this loss back 2 years
(to the earliest year first), reduce the reported income of these years, and receive a refund for the overpayment of taxes. This is called a loss carryback. If this loss is greater than the total income of the 3 previous years, the remainder may be carried forward to offset income of the next 20 years. This is called a loss carryforward.
(to the earliest year first), reduce the reported income of these years, and receive a refund for the overpayment of taxes. This is called a loss carryback. If this loss is greater than the total income of the 3 previous years, the remainder may be carried forward to offset income of the next 20 years. This is called a loss carryforward.
Thus the loss has a silver lining attached in that taxes of previous and future years are reduced. If a company wants, it may elect to forgo the carryback and use the loss only as a carryforward. In this
chapter, however, we will assume both carrybacks and carryforwards.
For carrybacks, an entry must be made to recognize a receivable for the tax refund, and a revenue for the
benefit of the carryback. This benefit reduces or “softens” the loss on the income statement.