Loss carryforwards are an essential tool for business owners to minimize their current and future liability on their taxes. By allowing businesses to spread their current net operating losses (NOL) over a greater number of future years and reduce the total amount of tax owed, businesses can continue to operate more effectively and at a lower cost.

A loss carryforward is created when a business’ net operating loss exceeds its current year’s net operating income (NOI). A net operating loss occurs when total expenses outpace total revenues. This loss can be carried forward and used to reduce net taxable income for a future tax year. Having this capability allows businesses to make up for previously accumulated losses, and therefore be able to offset some or all of their potential tax liability for a future tax period.

Before the Tax Cuts and Jobs Act (TCJA) came into effect in 2018, businesses could take advantage of a 2-year carryback provision and a 20-year carryforward provision. The 2-year carryback provision allowed businesses to spread their losses over two previous tax years, while the 20-year carryforward provision allowed businesses to carry those losses forward for a more extended period.

The TCJA changed the rules significantly, removing the 2-year carryback provision and extending the 20-year carryforward provision indefinitely, while also limiting carryforwards to 80% of net income in any future year. Net operating losses originating in tax years beginning prior to Jan. 1, 2018, are still subject to the former carryover rules.

For businesses that have continuing losses due to circumstances beyond their control (such as significantly reduced demand for their product or services due to unforeseen events) losses can be valuable in reducing their net future taxable income. Loss carryovers provide businesses with the flexibility to adjust their net income from one year to the next, ensuring that their tax liabilities remain manageable and sustainable. Furthermore, losses can be set up to last for 20+ years as long as they remain in operation, offering businesses a long-term liability shield.

In conclusion, loss carryforwards provide businesses with a viable tax management solution; allowing for the spreading of operating losses over time and reducing their future tax liabilities. With the new tax changes available, businesses should review their individual tax situations by speaking with an accountant or qualified tax professional to determine if they are eligible to take advantage of these new regulations.