What it is:
How it works (Example):
For example, if a company has a net operating loss in the current year of $2,000,000, it can carry that backward to the previous year to offset its net operating income of $2,000,000. The company would then have a zero tax liability ($2,000,000 less $2,000,000). At this point, the company could apply for a refund for the tax it paid on the original $2,000,000 if they have already remitted it.
For an individual or a company, the carryback period is 3 years.
Why it Matters:
A company which happens to find itself in a loss position for a particular year has at its disposal a tool that it can utilize to offset past profitable financial results. This is a situation where corporate or individual tax planning can be used retroactively.
By the same token, the company or individual can use this principle in their future tax planning when they anticipate they will have a loss in future years.