what is a loss carryback 
a loss carryback describes a situation in which a business experiences a net operating loss nol and chooses to apply that loss to a prior year s tax return this results in an immediate refund of taxes previously paid by reducing the tax liability for that previous year understanding a loss carrybackloss carrybacks are similar to loss carryforwards except that companies apply their net operating losses to preceding rather than subsequent years incomes the loss carryback will generate a tax refund of prior taxes paid by the business for that previous year due to its newly reduced tax liability after the carried back loss is applied it will be as though the business had overpaid its taxes for that year a business can choose how to apply a net operating loss nol when such a loss occurs for example it can choose to waive the carryback period and only carry the loss forward however once the decision has been made to carry the loss forward the action cannot be reversed 1it is important to note that an nol carryback is typically more beneficial than a carryforward because the time value of money shows that tax savings in the present are more valuable than in the future there may be very specific instances when a carryforward makes more sense for a certain business such as when business tax rates increase considerably however it s not the norm tax provisions allowing nols to be carried back have ranged from zero to five years historically because it is such a highly beneficial tax planning option to the taxpayer tax bills have often touched on carrybacks in times of recession the length of time taxpayers are allowed to carry back losses has been extended carrybacks have also been omitted from the tax code entirely as an option allowing only carryforwards it is important to know where the legislation sits at the point in time a carryback is being considered history of loss carrybacksthe nol carryback provision relating to federal income taxes was originally introduced as part of the revenue act of 1918 originally this federal income tax provision was intended to be a short lived benefit to companies incurring losses related to the sale of war related items in the post wwi era the initial carryback and carryforward collectively carryover provisions were only for one year the purpose of keeping the provision was to smooth the tax burden for companies whose primary business is cyclical in nature but not in line with a standard tax year this is common with agricultural businesses as they are highly dependent on weather conditions and may have one successful year followed by a year with a major net operating loss 2over the following years the allowable duration for carryovers has been extended decreased omitted entirely and reinstated we will look only at the major changes to the carryback provision over the last few decades some states have stricter income percentages or time limits on carrybacks or carryforwards for state income tax purposes real world exampletax loss carrybacks got new attention in september 2020 when the new york times released details surrounding president trump s 2009 tax return according to the times article confidential records show that starting in 2010 he claimed and received an income tax refund totaling 72 9 million all the federal income tax he had paid for 2005 through 2008 plus interest 4 this was made possible through an nol carryback provision that changed as a result of the worker homeownership and business assistance act of 2009 signed into law by president obama 5the 2009 tax law allowed a five year nol carryback provision for tax years 2008 and 2009 rather than the two year carryback provision that was in place at the time 5 this meant that nols incurred during 2008 and 2009 could be applied toward a refund of taxes previously paid in the five years preceding the loss if the taxpayer elected to carry back an nol to the fifth preceding year the nol carryback was limited to 50 of the taxable income in the fifth preceding year however the remaining nol balance could be carried forward to the fourth preceding year and so on until the loss was fully exhausted 6