Carryover Definition and Legal Meaning
On this page, you'll find the legal definition and meaning of Carryover, written in plain English, along with examples of how it is used.
What is Carryover?
(n) Carryover is the practice by which the loss occurred, expenses incurred or permissible deductions available in a particular year is carry forward to setoff them against the future profit so as to reduce the tax burden when the entity start making taxable profit.
History and Meaning of Carryover
Carryover is a legal term usually employed in the context of taxation. It refers to the process whereby losses or expenses incurred in a particular year are carried forward to future years to offset against taxable profits, thereby reducing the tax burden of individuals or organizations. The idea behind carryover is to ensure that taxpayers are not penalized for temporary setbacks.
Carryover is a common tax planning strategy used by businesses, particularly those that experience volatile profits, to reduce their taxable income. By employing carryover, businesses can offset losses incurred in one financial year against the profits earned in future financial years, thereby reducing their tax bills.
Examples of Carryover
- A company has incurred a loss of $50,000 in the financial year 2020 and a profit of $70,000 in the financial year 2021. The company can carry forward the loss of $50,000 to the next year and set it off against the profit of $70,000. This way, the company's taxable income for 2021 would only be $20,000.
- John is a freelance graphic designer who has incurred expenses of $2,000 in 2020 but has made no income that year. In 2021, John earns a taxable income of $6,000. With carryover, John can reduce his taxable income by $2,000, so he is only required to pay taxes on $4,000 of his income.
- A corporation has a net operating loss of $100,000 in 2020. The company can carry forward this loss to future years and offset it against future profits. As a result, the company can reduce its tax liability in future profitable years.
Legal Terms Similar to Carryover
- Net Operating Loss (NOL) - NOL refers to the amount by which a company's allowable tax deductions exceed its taxable income. A net operating loss can be carried forward or backward to offset taxable income in other tax years.
- Capital Loss Carryover - This term refers to the practice of carrying forward a net capital loss to future tax years to offset capital gains and reduce tax liability.
- Allowable Deductions - Allowable deductions refer to expenses incurred in the course of conducting a business or earning income that are deductible for tax purposes. They can be carried forward to future tax years if the taxpayer does not have enough taxable income to claim the full deduction.