Could someone explain "tax loss carryforward"

[freethought]

There is a post in GD, I believe, that tells us about the GAO and their interest in "reexamining" the mortgage interest deduction used on peoples income tax returns. Some one mentioned in a reply something about "tax loss carryforward". What exactly is this? How does this work?

Thanks in Advance! By the way, y'all may want to check that thread out.

[bemildred]

1. There are limits on the amount of "loss" one can take in any given year.

As an offset to "income" generally, that is, as a means
of reducing taxes due.

The remainder can be "carried forward" to future years. This
is particularly useful if one has some huge "loss" and only
limited "income" in this year.

There are variations based on the type of "loss" and other
sorts of bullshit, but that is the basic idea.

[freethought]

3. Let's see if I understand this correctly

Your company posts a loss for a given quarter. The IRS says that for any given quarter you are entitled to only so much loss. As you said, the remainder of this loss can be "carried Forward" to the future. As a result you can reduce your company's tax liabilities even if your company had a record next quarter. Do I have the jist of this?
How far can these "losses" be carried forward?

[bemildred]

6. I think you have it.

How far they can be carried forward depends, but the rules
are not generally stringent in those areas I am aquainted with.

[FloridaPat]

8. There's a difference between you & a corporation. You have the limit.

A corporation doesn't. If loss exceeds income, that can be carried over next year.

They're carried over until balance is 0.

[punpirate]

2. Basically, if you have a business tax loss in a given tax year...

... that exceeds your tax liability for that year, you can use the remainder in future tax years, under some circumstances.

[freethought]

5. Do you know what these "circumstances" are?

If some corp posts a loss for a given quarter or tax year, whatever, It won't pay taxes. Hey, fine! But to allow some company to carry losses forward, it almost seems like an invite to incurring deliberate losses or some serious accounting games. Also, the fellow who made the post said that if one company buys another company that's seriously in the red, the buyer company 'inherits' those losses to reduce its own tax liability. Is this true?

[punpirate]

9. You'd have to ask a corporate tax accountant...

... or an IRS specialist for all the details, but for corporate tax purposes, it's a fairly broad range of allowed circumstances. Bad business decisions (say, if the company buys another new company with a new product for which no market develops), unforeseen circumstances, downsizing, restructuring, mergers, etc., may all create big losses in a single year which may be spread out into one or more future tax years.

[Cassandra]

4. Thanks to my broker...

I had a major capital loss when the stock bubble burst. I am only entitled to take $3000 against my income in any given year, although it would offset any capital gain. What I haven't used yet is my tax loss carryforward.

[freethought]

7. Looks as if this applies to personal income as well!

I trust this applies to an actual loss on a stock sale? I as well have taken losses on stock sales but they were never very big.

[bmcatt]

10. Capital loss vs. capital gains...

The carryover allows you to carry over excess capital loss and apply it to capital gains in following years (subject to a bunch of limitations).

Short example - if you have a capital loss of $4K this year, but you have capital gains of $3K, you can completely wipe out the $3K of gains, but the $1K of excess loss carries over. If you have at least $1K of capital gain the next year, it's applied there. Otherwise, it continues to carry over (for a limited time - not sure of the exact limitations).

You *cannot* apply carryover capital losses to income. They're two different things and, for personal taxes, they don't mingle that early.

IANATA (I Am Not A Tax Accountant), so feel free to take this with the requisite amount of salt, but this is the rules as I understand them.

[Cassandra]

11. My accountant says I can...

but only $3k a year against income, regardless that my original loss is much larger than that. I may also be getting a bit of capital gains from investments covered as well. When I went through arbitration and won back my broker's fees (her ass was fired), that was considered a capital gain that soaked up an equal amount of loss.

[dannynyc]

12. There are several types of tax loss carryforwards

For individuals, there is a capital loss carryforward and an operating loss carryforward. (There are others, but, I'm just responding to this question.)

The quick answer is -

Capital gains and losses are combined. A net capital gain is taxed. A net capital loss is deductible up to $3,000 per year. Any loss in excess of $3,000 per year can be carried forward to offset future gains or against other income, up to $3,000 per year.

If a person has an loss due to a business activity (inidividual business, share of partnership), and this loss offsets other business income in a given year, it can be carried forward to offset losses in future years.

These losses can also be carried back to offset gains / income from prior years.

This is a very short overview of the topic - I'm just trying to explain the difference between capital and operating losses. Reality gets much more complex.