Deducting tax losses from previous years

Deducting tax losses from previous years allows companies and entrepreneurs to reduce their tax base once things start going well for them. It is an important tool that takes into account that every business naturally has better and worse periods, and it spreads the tax burden more fairly over time. Thanks to it, a company that makes a loss one year and a profit the next does not have to pay tax as if it had been profitable all along. That is precisely why no entrepreneur should overlook the deduction of losses.

What a tax loss is

A tax loss arises when tax-deductible expenses for a given period exceed taxable income. Under set conditions, a loss reported in this way can be claimed in the following years, reducing your future tax liability. It is therefore a kind of tax reserve that you carry forward to better times. It can arise, for example, when a business is starting up, when larger investments are made or in an economically weaker year. What matters is to report the loss correctly in your tax return so that you can claim it later without any problems.

How the deduction works

The taxpayer gradually deducts the reported loss from a positive tax base in the following tax periods. Specific rules determine over how many years, and up to what maximum amount in each year, the loss can be claimed.

• The loss is deducted from a positive tax base
• It is claimed over a period defined by law
• There may be an annual limit on the amount of the deduction

Conditions and limits

Both the specific number of years over which a loss can be deducted and any annual limit on the amount of the deduction have changed over time. You should therefore check the current rules for the period in which you are claiming the loss. The correct order in which you deduct the individual losses from different years also matters.

Records and documentation

To be able to claim the loss smoothly and reliably, keep clear records of all reported losses, broken down by year and by the amounts already claimed. In the event of an audit, you can then easily demonstrate how you arrived at the deduction. A clear table of losses by year and of the remaining amounts will also help you plan how much you can still deduct in the future. As a result, no part of your entitlement will be lost simply because your records were not thorough enough.

• Record each loss by the year in which it arose
• Keep track of how much you have already deducted from each loss
• Keep the supporting documents for the original tax return

Common mistakes

Companies sometimes simply forget to claim the loss in time and lose the entitlement irretrievably, or they use the wrong order or amount of deduction. You also need to be careful with certain changes in the company, such as a change in the ownership structure, which can affect or restrict the option to deduct a loss.

Why involve an expert

A correctly claimed deduction of losses from previous years can significantly reduce tax in profitable periods and so improve the company’s financial results. As the rules tend to be quite complex and change over time, it pays to discuss the whole procedure with an accountant or tax adviser. They will also advise you on how to combine the loss with other tools, such as depreciation or special deductions. Together, you will achieve the lowest possible tax burden within the law.

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Frequently asked questions

How many years back can I claim a tax loss?

The deduction is possible over a number of years defined by law, which has changed over time. Check the current rules and any annual limit for the period in which you are claiming the loss.

Do I have to deduct the loss all at once?

Not necessarily. The loss is generally deducted gradually over the following periods, and an annual limit on the amount may apply. What matters is to claim it in time and in the correct order.