Tax Question:

Can I apply corporate losses against profits?

Facts:

When a corporation incurs a loss it can carry that loss back three years or forward a set number of years depending on the type of loss.

Discussion:

The ability to carry back losses or carry forward losses is a type of income averaging. If you think about three consecutive years where year one has a loss and year two has a profit and year three has a loss but overall there is a loss, you would as a business person be concerned about taxes being paid and being “lost” in year two.

In this example, the losses from year one would automatically offset profits in year two and the tax calculated in year two would be on the total net profit of years one and two. Then if there was a loss in year three that loss could be carried back to offset profits in year two and trigger a refund. However, the loss carry-back is not automatic and there are rules about timely filing of tax returns that can prevent losses being used to trigger refunds.

Not all losses are created equal and so it is important to understand the type of loss that has arisen. Losses as a result of a company’s day-to-day operations, termed non-capital losses, can be carried forward up to 20 years and applied against any type of income. Losses as a result of capital gains, termed capital losses can be carried forward indefinitely but can only be applied against capital gains. So, if a company had sold a non-depreciable asset such as land at a loss, this loss could not be applied against the profit generated from the normal activities of the company. Instead it is “banked” until the company generates a capital gain. On the other hand, if a company has losses from normal operations these losses can be applied to any income stream, including capital gains.

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