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Simple English definitions for legal terms
tax-loss carryover
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A quick definition of tax-loss carryover:
Tax-Loss Carryover: When a business or individual has more deductions than income in a given year, they may have a net operating loss. This loss can be carried over to future years to offset taxable income and reduce taxes owed. This is called a tax-loss carryover and can be used for up to five years after the initial loss.
A more thorough explanation:
Tax-loss carryover is a deduction in income tax that cannot be fully used in a particular year but can be carried over to the next five years. It is also known as loss carryover, carryforward, loss carryforward, or tax-loss carryforward.
For example, if a business incurs a net operating loss of $50,000 in a particular year and its taxable income is zero, it can carry over the $50,000 loss to the next year. In the next year, if the business has a taxable income of $70,000, it can deduct the $50,000 loss carryover from its taxable income, resulting in a taxable income of $20,000.
Tax-loss carryover is beneficial for businesses that experience losses in a particular year as it allows them to offset their future taxable income and reduce their tax liability.