What is a net operating Loss carryback and carryforward? A net operating loss occurs when a company’s operating expenses and allowable tax deductions exceed its operating income for an accounting period. Companies pay taxes on operating income. When companies incur an operating loss, there is no taxable income, so they pay no taxes. According to GAAP, companies can take an operating loss in the current period and use it to offset operating gains in past or future periods.
In the U.S., an operating loss can be “carried-back” to offset operating income from previous periods. Or it can be “carried-forward” to offset operating income in future periods. Companies subtract the amount of the operating loss in one period from operating income in previous or future periods. Then they are able to reduce the taxable income in those periods.
According to GAAP, a net operating loss can be carried-back up to 3 years. That is, apply it to any year within three years prior to the year in which the operating loss is incurred. You can carry-forward a net operating loss up to 7 years. Apply the loss to any year within seven years after the year in which the operating loss is incurred.