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.
Pro tip: Model both scenarios—carryback for immediate cash vs. carryforward for potentially higher-rate savings—before filing elections.