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Loss Carryback

Moneyzine Editor
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Moneyzine Editor
2 mins
November 6th, 2024
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Loss Carryback

Definition

The financial accounting term loss carryback refers to an income-averaging provision that allows a company to apply a net operating loss to the preceding two years. When a net operating loss occurs, an income-averaging provision of the tax law allows companies to carry the amount back two years and receive an immediate tax rebate.

Explanation

Also known as a NOL, a net operating loss occurs when a company's taxable expenses are in excess of its taxable revenue. Since companies are required to pay income taxes when profitable, the tax law provides some relief when operating at a loss. There are two methods a business can use to recapture a portion of their previously paid income taxes: a loss carryback or loss carryforward.

With a loss carryback, the business applies the net operating loss to each of the preceding two tax years. When the current tax year's operating loss is applied retroactively to the prior years' returns, the business is provided with a near term tax rebate.

Example

In the current tax year, Company A suffered a net operating loss of $9,000,000 and has decided to file a loss carryback with the IRS. Company A's taxable income in the preceding two years is shown in the table below:

Taxable Income

Tax Rate

Income Taxes Payable

Year 1

$6,000,000

40%

$2,400,000

Year 2

$8,000,000

40%

$3,200,000

The tax refund generated by the carryback would be calculated as:

Year 1

Year 2

Taxable Income

$8,000,000

$6,000,000

Less: Carryback

$8,000,000

$1,000,000

Taxable Income After Carryback

$0

$5,000,000

Tax Rate

40%

40%

Income Taxes Payable

$0

$2,000,000

Taxes Paid

$3,200,000

$2,400,000

Rebate

$3,200,000

$400,000

The journal entry to record this transaction would be:

Debit

Credit

Income Tax Refund Receivable

$3,600,000

Refund of Income Taxes From Loss Carryback

$3,600,000

Related Terms

  • Deferred Income Taxes
    Deferred income tax is the accounting term used to describe situations where the income tax expense and the income tax payable are not the same. Deferred income taxes are listed on the balance sheet as a liability.
    Moneyzine Editor
    Moneyzine Editor
    November 6th, 2024
  • The financial accounting term net operating loss refers to accounting periods or tax years in which the tax-deductible expenses of a company are in excess of their taxable revenues. When a net operating loss occurs, the tax law contains an income averaging provision that allows a company to carry the amount back to the preceding two years, or carry it forward for up to 20 years.
    Moneyzine Editor
    Moneyzine Editor
    November 6th, 2024
  • Loss Carryforward
    The financial accounting term loss carryforward refers to an income-averaging provision that allows a company to apply a net operating loss to taxable income for up to 20 years in the future. When a net operating loss occurs, an income-averaging provision of the tax law allows companies to carry the amount forward for up to 20 years, thereby lowering the amount of income taxes payable in the future.
    Moneyzine Editor
    Moneyzine Editor
    January 24th, 2024

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