Carryback Definition and Legal Meaning
On this page, you'll find the legal definition and meaning of Carryback, written in plain English, along with examples of how it is used.
What is Carryback?
(n) Carry back is the practice by which the loss incurred in a particular year is used to setoff the gain or profit of the previous years so as to reduce the tax burden of the previous years where there was a taxable profit.
History and Meaning of Carryback
Carryback is a tax accounting term that refers to a practice by which a business or an individual can use a loss incurred in a specific year to cut down on their tax burden in the previous years in which they made a profit. The carryback process can be used to request a refund of taxes paid in previous years, which can be due to net operating losses (NOL).
NOL occurs when a business's expenses exceed its revenue, resulting in a loss for the year. In the United States, businesses can "carryback" the NOL and apply it to previous years when they had taxable income, resulting in a reduced tax burden for those years.
Examples of Carryback
ABC Corporation reported a loss of $50,000 in the year 2020, but it had a taxable income of $100,000 in 2019. As a result, the corporation opt to use the carryback provision to reduce its taxable income for the year 2019 to $50,000 and receive a $7,500 refund on its 2019 taxes paid.
An individual who owns a small business experiences a net operating loss of $15,000 in the year 2020. Since they had a taxable income of $50,000 in the year 2019 and $45,000 in taxes owed for that year, the individual can carry back the loss to 2019, reducing the taxable income to $35,000 and resulting in a refund of $2,250.
A real estate investor incurs a loss of $25,000 in 2020 due to depreciation but had a taxable income of $120,000 in 2019. The investor can carry back the loss to the year 2019 to reduce taxable income to $95,000 and get a refund on the taxes paid in 2019.
Legal Terms Similar to Carryback
Carryover: This term refers to the loss that is not used up in the current year, which can be carried over to the following year to offset future taxable income.
Net Operating Loss (NOL): It refers to the excess of operating expenses in a particular period that exceeds revenue earned in the period. NOL can be carried back or forward to reduce tax liabilities in previous or future years.
Tax refund: It is a reimbursement of tax paid by an individual or business when the taxes paid exceed the tax liability owed for a given year. A taxpayer has the right to apply for a refund of excess taxes paid to the government.