Partial Loss Refundability: How are Corporate Tax Losses Used‪?‬

INTRODUCTION The asymmetric treatment of tax losses is an attribute common to all corporate income tax systems. If a corporation s income exceeds allowable deductions, then its net income is taxed at the statutory rate. However, if the reverse holds true, a corporation does not receive a refund equal to the tax value of its loss. Instead, corporations must carry losses backward or forward in time to offset prior or future payments of tax. In most cases, firms are forced to carry some portion of their tax loss forward. Carryforward firms receive only a partial refund of their tax loss because the real value of the loss erodes over time. For certain firms, losses that are carried forward have no inherent value as the firm is unable to generate sufficient taxable income to ever utilize the loss.