Recognition of Tax Benefits in the Loss Year Due to a Loss Carryforward
If your business has negative taxable income or a net operating loss in any tax year, it may be able to carry forward that loss into the following year to reduce its taxable income. The tax reduction can be a valuable resource to a business when it is going through difficult times.
In addition to carrying losses over into future years, a business can also use the loss to offset taxes it has paid in previous tax years. This can help a company recover from a difficult financial situation more quickly and efficiently.
Individual investors who are not business owners can also carry capital losses over to offset gains they generate on other investments in the same tax year, or future years if the loss exceeds the gain. The IRS allows investors to deduct up to $3,000 in capital losses from their ordinary taxable income, and to use the excess amount to offset capital gains in any year.
Non-Capital Loss Carrybacks
To carry back a non-capital loss, complete Form T1A, Request for Loss Carry Back (line 25200 on line 252 prior to 2019) and include it with your 2021 Income Tax and Benefit Return. The form is part of tax preparation software, so it can be completed at the same time as filing your tax return.
The TCJA limited the carryback of net operating losses to 80% of the company’s taxable income for taxation years ending in 2021 and later. This means that if your business loses $5 million in 2021, you can only carry back a maximum of $4.8 million to 2022.