Tax loss carryforward


A tax loss carryforward, sometimes abbreviated as a loss carryforward, refers to the practice of applying a previous year's loss to reduce the current year's profits for tax purposes.

For example, if a company earned $50 million in the current year, but lost $50 million the previous year, the company would not owe any taxes, as the previous year's losses wold offset the current year's profits.

Tax loss carryforwards are considered a Deferred Tax Asset on a company's balance sheet.

According to Generally Accepted Accounting Principles (GAAP), tax losses can only be carried forward for 7 years. If a company does not expect its profits in the near future will be large enough to use up its tax loss carryforwards before they expire, it must report a Valuation Allowance on its balance sheet to account for the fact that it will not be able to make use of these loss carryforwards.

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