carry forward losses

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The right to deduct past losses from present profits in calculating liability to tax. Most tax systems collect taxes from companies and unincorporated businesses which make profits, but do not make payments to firms making losses, presumably because it is believed that the fraudulent production of apparent losses would be too easy. This asymmetry in the treatment of profits and losses tends to discourage investment. To minimize this discouragement firms are allowed to carry forward losses. This means that if a firm has made a loss in one period, if and when it returns to profit it will be allowed to deduct the loss carried forward in calculating its taxable income. It may thus pay a profitable business to acquire another business whose main asset is previous losses which can be carried forward for tax purposes.

Subjects: Economics.

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