Carrybacks: Using Past Losses to Unlock Refunds

What is a carryback?

A carryback applies current-year losses (or certain credits) to prior-year income, producing refunds. Rules vary by loss type and year of loss (e.g., NOL carrybacks were modified by the CARES Act for specific years).

Where carrybacks apply

• NOLs:Generally carryforward-only post-2017, but specific years (e.g., 2018-2020 under CARES) allowed 5-year carrybacks; some states differ.
• Capital losses (C corps):3-year carryback, 5-year carryforward; individuals cannot carry back capital losses.
• Credits:Certain business credits (e.g., general business credit) may have limited carryback periods.

Benefits

• Immediate cash via refunds from profitable prior years.
• Possible rate arbitrage if prior years had higher tax rates.
• May improve liquidity during downturns without selling assets.

Strategies

• Choose carryback vs. waiver:If current/future rates are higher, waiving a carryback might yield better total savings; otherwise, take the fast refund.
• Align with other deductions:Avoid wasting deductions in a carryback year where income is already fully offset.
• State planning:States may disallow or limit carrybacks; model state vs. federal results.
• Cash-flow timing:Use quick refund forms (e.g., Form 1045/1139 where applicable) to accelerate payment instead of waiting for an amended return.

How to execute

• Verify eligibility (type of loss, tax year) and consider electing out if more favorable.
• Prepare carryback calculations, schedules, and supporting statements.
• File the proper form (or amended returns) within the statutory window.