Business doesn’t always go according to plan. Maybe you’ve had a tough quarter, faced some unexpected expenses, or just hit a rough patch. It happens to the best of us. But here’s the thing to remember: when your business experiences a loss, you don’t have to shrug it off and start over from scratch. You’ve got a tool in your corner that can help you bounce back: tax loss carryforwards.
Think of them as a financial safety net, letting you take losses from one year and apply them to future profits. This is a game-changer for businesses navigating unpredictable times, and in this blog, we’ll explain how it works and why it matters for your business.
So, What Exactly Are Tax Loss Carryforwards?
Tax loss carryforwards lets your business take a loss from one year and apply it to reduce taxable income in future years. Simply put, if you lose money in one year, you can use that loss to offset future profits, lowering your taxable income and reducing your tax bill. Essentially, you’re getting a “do-over" for those down years when your business gets back on its feet.
For example, let’s say your business lost $50,000 last year. The next time you make a profit, you can use those capital losses to lower your taxable income and, in turn, your taxes. It’s a huge advantage when scaling up or recovering after a rough patch.
Why Should You Care About Tax Loss Carryforwards?
- Tax Flexibility: Every business goes through highs and lows. Having tax loss carryforwards gives you a safety cushion, allowing you to better manage taxes in the good times and the bad. It’s like having a buffer that helps even things out so you don’t get hit too hard during the profitable years after a tough one.
- Cash Flow Relief: Applying a carryforward to future years means less money goes out the door in taxes when your business needs it most. This extra cash flow can go into expanding your team, investing in new opportunities, or keeping things running smoothly. It’s about keeping your business in motion, no matter what.
- Smart Financial Planning: Tax loss carryforwards aren’t just a “get out of jail free" card—they’re a smart, strategic way to plan your finances. They allow you to bounce back stronger after a loss and use those losses to fuel future growth. It’s about building for the long term, even when things aren’t perfect now.
A Few Key Things to Know
While tax loss carryforwards are super helpful, there are some critical things to keep in mind:
- How Long Can You Carry Them?: You can carry forward losses for up to 20 years, which gives your business plenty of time to apply those losses to future profits.
- Ownership Changes Matter: If your company changes ownership, the rules around carryforwards may change, too. So, if you’re thinking about selling or restructuring, understand how it could affect your tax situation.
- Tax Law Updates: Tax laws change. Recently, changes to carryforward rules under the Tax Cuts and Jobs Act have impacted how and when losses are applied. Keeping track of these changes is crucial.
How Current Accounting Can Help
Tax loss carryforwards are fantastic but can be tricky to navigate without the right expertise. Here’s where Current Accounting comes into the picture:
- Tracking Losses: Our Charleston accounting team will ensure your losses are accurately tracked so that you can use them in the future when you need them most.
- Strategic Tax Planning: We help you determine the best times to apply carryforwards to optimize your business growth. It’s not just about using them—it’s about using them correctly.
- Compliance: Staying compliant with tax laws is key. We help you make sure everything’s in line so you’re not caught off guard by penalties or audits.
- Growth Forecasting: Understanding how carryforwards fit into your future financials helps you plan for scaling, expanding, or reinvesting without being bogged down by your tax liability.
Unlock the Power of Tax Carryforwards with Current Accounting
Tax loss carryforwards may not sound like the most exciting topic, but they’re a powerful tool for keeping your business on track. They help you balance out losses and profits, stabilize your cash flow, and keep your business on a solid financial footing. At Current Accounting, we help you make tax loss carryforwards work for you, not the other way around. Whether navigating a tough year or planning for future growth, we’re here to guide you through tax planning so you can focus on growing your business.
Want to learn more about how tax loss carryforwards can work for you? Contact us to discover how we can help maximize your financial strategy for long-term success.