What Happens if You Have a Negative Income in Your Corporation for the Year?
No one is in business to lose money, but it does happen, and it doesn't necessarily mean disaster. If your business is structured as a corporation and it has negative income for the year -- in other words, a loss as opposed to a profit -- it's not the end of the world. The company doesn't have to pay income taxes, and there's even a silver-lining tax break for posting a loss.
A corporation can report negative income if its revenue is too low, its expenses are too high, or both. Posting a loss doesn't always indicate that a company is in trouble. A company may take a big write-off, producing a huge one-time expense that translates into a loss on paper but actually strengthens the enterprise for the long term. Similarly, revenue may take a hit for the year because the company was retooling or renovating or because significant revenue was deferred until the next year. Whether the company stays afloat depends more on its cash flow -- how much cash is coming in and going out -- and its ability to meet its obligations going forward.
The tax code helps soften the blow from corporate losses. Imagine your corporation posts a $50,000 profit one year and has a $40,000 loss in the next. Corporations pay income taxes on their profits, so if your company has a tax rate of 30 percent, your taxes the first year will be $15,000. The second year, you'll pay nothing, because you had no profit. Now look at the two years put together: Your net profit comes out to a paltry $10,000, but you've paid $15,000 in taxes on profits. That's not fair, and the tax system recognizes that it isn't fair.
Corporations can carry their losses into other years to offset taxable income in those years, thereby cutting their tax liability. To continue the previous example, after your corporation lost $50,000 in the second year, you could file an amended tax return for the first year. On the amended return, you'd claim a $40,000 "net operating loss carryback" that would offset $40,000 worth of your corporate profit for the year. Your new profit for the year would be $10,000. At a 30 percent tax rate, you'd owe only $3,000 in taxes, so you'd get a refund for the other $12,000 you paid in taxes that year.
In general, a corporation with a loss for a year can carry that loss back up to two years by filing amended returns. Any leftover losses can then be carried forward for up to 20 years. The corporation can choose to waive the carryback provision, however, and simply carry the losses forward. Any portion of the loss that hasn't been used up at the end of 20 years will be canceled.