Question

Explain how a corporation reporting a taxable loss can be an income tax benefit

Answer 1

A tax loss carryforward (or carryover) is a provision that allows a taxpayer to carry over a tax loss to future years to offset a profit. The tax loss carryforward can be claimed by an individual or a business in order to reduce any future tax payments.

• A tax loss carryforward allows taxpayers to utilize a taxable loss in the current period and instead apply it to a future tax period.
• Capital losses that exceed capital gains in a year may be used to offset ordinary taxable income up to $3,000 in any one tax year.
• Tax losses can also be carried forward from losses incurred in business pursuits, but those are labeled simply loss carryover.

Consider a tax loss carryforward to be the opposite of profit, or a negative profit, for tax purposes. It happens when expenses are greater than revenue or capital losses are greater than capital gains. This provision is a great tool for creating future tax relief. In most cases, the carryforward can be valid for up to seven years, although most states do have their own rules.

In addition to selling investments, the sale of a home results in a capital gain, and the property tax base of a house is its assessed value, which may or may not be the sale price recognized. The property tax base of a city is the collective value of all taxable real estate in the city. Tax loss carryforwards may also accrue to individuals tax returns that report business losses, losses on rental properties, and gambling losses (in some cases). Note that a tax loss carryforward is different from a loss carryforward. Loss carryforward applies to incorporated companies that make a net operating loss on income, not on capital losses.