What is a tax loss carryforward?

A tax loss carryforward is a provision that allows taxpayers to apply a net operating loss to future tax years. This means that if a business or individual incurs a loss in one tax year, they can carry that loss forward to offset taxable income in future years. This practice helps in reducing the overall tax liability because the loss can effectively decrease income and lower taxes owed in profitable years.

By being able to deduct that loss in the future, taxpayers can manage their tax burdens more effectively over time. This is particularly beneficial for businesses that may experience fluctuating profits, as it provides a means to stabilize their tax obligations across different periods of income.

The other choices do not accurately define what a tax loss carryforward entails. While a current deduction pertains to losses that can be used immediately, a carryforward specifically pertains to future utilization of losses. Similarly, interest on a principal and capital gains tax relate to taxation in different contexts and do not address the concept of offsetting income with a prior year's losses.