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What Is Net Operating Loss Carryback?

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  • Written By: Kenneth W. Michael Wills
  • Edited By: Kaci Lane Hindman
  • Last Modified Date: 22 November 2016
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When a business accrues more expenses in a year than the business makes in revenue, typically this incident is referred to as a net operating loss. Net operating loss carryback refers to applying that loss to previous tax returns to help offset taxable income in previous years. On the other side of the equation, net operating loss carryforward refers to applying the operating loss on future tax returns to accomplish the same ends. Tax regulations have to be followed, however, to apply such deductions correctly, while accounted expenses usually need to be deductable expenses allowable by the tax code in the jurisdiction where the business is filing. Rational behind such deductions is that a profitable business accrues income that is subjected to taxation; therefore, a business that loses income should not be burdened with same taxation.

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Depending on the stipulations as read in the tax code of the jurisdiction where the business files taxes, net operating loss carryback can be applied retroactively up the a certain number of years — usually two years, but sometimes five years maximum. For example, at the end of 2011 if a company records a net operating loss, the accountant will carry this loss backward to preceding years — called the carryback period — where the business was profitable and had tax liability. From there the accountant will work out how much to apply to each year and then record that amount as a tax credit for 2011. Dependent on the size of the operating loss, this may also result in the business being able to request a refund on previous taxes paid.

In the event the operating loss is so large that the net operating loss carryback is not able to sufficiently dissolve tax liability equitably, the remaining amount is usually applied to future earnings. Accomplishing this matter, accountants will record the net loss in the current year and in the next tax year apply the loss as a credit. Carrying forward this amount is referred to as the carryforward period, while the amount carried forward is called the carryforward balance.

Important to note, however, is that the net operating loss carryback rules do not apply the same to every business. Furthermore, in some jurisdictions individuals may also use the net operating loss rules as a form of tax relief. Corporations will usually have a different set of rules to follow than other types of businesses. Additionally, some types of businesses are not commonly covered under the rules to include partnerships, S-corporations and limited liability companies. Instead, these businesses are usually covered under additional tax code provisions that dictate how to handle operating losses.

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