Legal Definitions - carryforward

Carryforward refers to the practice of applying a financial item, such as a loss, credit, or unused allowance, from one accounting or tax period to a future period. This allows individuals or businesses to utilize benefits or offset liabilities that could not be fully used in the original period, effectively transferring their impact to a later time.

• Example 1: Taxable Capital Losses

  Imagine an individual who sells a significant amount of stock and incurs a substantial capital loss in a particular tax year. Current tax laws often limit how much of this capital loss can be deducted against ordinary income in that specific year. If the loss exceeds this limit, the unused portion can be carried forward to future tax years. This means the individual can use that excess loss to offset future capital gains, or a limited amount of ordinary income, in subsequent years until the entire loss is utilized.

  This illustrates carryforward because the financial disadvantage (the capital loss) from one year is not lost but is instead moved to future years to reduce potential tax liabilities in those later periods.

• Example 2: Net Operating Losses (NOLs) for Businesses

  Consider a new technology startup that experiences a significant net operating loss (NOL) in its initial year due to high research and development costs and minimal revenue. Instead of simply absorbing this loss without any future benefit, tax regulations typically allow the company to carry forward this NOL. This enables the startup to deduct the loss against future profits once it becomes profitable, thereby reducing its taxable income and, consequently, its tax bill in those later, more successful years.

  Here, the financial deficit (the NOL) from a loss-making period is transferred to future profitable periods to offset income, directly demonstrating the concept of carryforward.

• Example 3: Unused Charitable Contributions

  Suppose a generous individual makes a very large cash donation to a qualified charity in one year, exceeding the percentage of their adjusted gross income (AGI) that can be deducted for tax purposes in that specific year. Tax rules often permit the taxpayer to carry forward the unused portion of this charitable contribution for up to five subsequent tax years. This allows them to deduct the remaining amount in future years, subject to the annual AGI limits, until the entire contribution has been claimed.

  This example shows carryforward because the benefit of the charitable donation, which couldn't be fully utilized in the year it was made, is transferred to future tax periods to reduce future tax obligations.