Taxes are a tricky subject. Love them or hate them, taxes help to provide for our country’s services and wellbeing. While some may not agree with the implementation of certain taxes, and politicians may vow to change them, the reality is that they are here to stay, so it is best to be educated on how certain policies affect you and your business.
A big part of understanding best tax practices is knowing how to pay them, and how to use them to your advantage. With current headlines claiming that certain tax policies like the Net Operating Loss Carryback and Carryforward Provisions are either a genius move or a cowardly loophole, the fact of the matter is that the Net Operating Loss Provision is a legal tax practice that is used by many businesses each year.
First created with the Revenue Act of 1918, the Net Operating Loss was established as a provision to allow corporations to, quite literally, carryback and carryforward any expenses that exceeded their revenue yearly when filing taxes. Established at the end of World War I with the expectation of loss in business, this provision was created to help alleviate corporations of a tax burden on funds they lost while operating.
Still in practice today, the Net Operating Loss Provision allows for companies who have lost money to offset their taxable income, which reduces the tax liability of the reporting entity. With the provision, companies have the option of carrying the amount back over the preceding two tax years and applying it against any taxable income – often resulting in an immediate tax rebate, or carrying the amount forward for the next 20 years and applying it against any future taxable income, reducing tax liability over the course of those years. However, the Net Operating Loss does expire after a 20 year time period.
The Net Operating Loss Carryback and Carryforward Provisions may be making headlines today, but they have been a major factor in tax policy for nearly a century, and will continue to be for many years to come. Tax policies and provisions are established to protect individuals and businesses within the United States, and can be a very powerful tool when utilized. While controversial, the Net Operating Loss Provision is a completely legal way for businesses to operate under the United States governing tax policy.
For more information on tax policies and provisions, visit Evolve Financial today.