Carryforward deduction of net operating losses: 10-year carryforward, requiring blue returns and continuous filingEven if you have a loss year, it can be subtracted from profits in later years
This system allows losses that arose in business years beginning within 10 years before the start of each business year to be deducted from the income of that business year. To deduct, you must have filed a blue return for the business year in which the loss arose, and have continuously filed tax returns and kept books and records since.
- Income before deduction
- JPY 10 million
- Loss carried forward
- JPY 20 million
- Deduction limit (income x 50%)
- JPY 5 million
- Income after deduction
- JPY 5 million
Key points
- Carryforward period: losses of business years that began within 10 years before the start date (9 years for business years that began before April 1, 2018)
- Deduction limit: for corporations other than small and medium-sized corporations, etc., the limit is 50% of income before the deduction (business years beginning on or after April 1, 2018)
- Requirements: a blue return was filed for the business year in which the loss arose, tax returns have been filed continuously since, and the related books and records are kept
- Losses from the blue return period remain eligible even if a white return is filed afterward
- The deduction cannot be used in certain cases, such as where a corporation that came under a specified controlling relationship discontinues its old business within 5 years and takes on borrowing of more than about 5 times the size of the old business
What to do in practice
- Check the blue returns for the loss years and copies of the returns filed continuously afterward
- Manage the balance of carried-forward losses by year in a list, together with the 10-year deadline
When a company has a year in the red, there is a system that lets it subtract that loss from the profits of later years when calculating tax. The loss can be subtracted if it happened within 10 years. However, the condition is that the company keeps filing its return properly every year.
- The loss yearFile a blue return
- From the next yearKeep filing every year
- The profit yearSubtract past losses from the profit
- Up to the 10th yearLosses up to this point can be subtracted
Points
- A loss can be subtracted from this year's profit, going back up to 10 years
- The condition is that the loss year was filed as a blue return and that returns have been filed every year since
- Depending on the type of company, there is a limit on how much can be subtracted
What the words mean
- Net operating loss
- The amount by which a company ended up in the red in one year
- Carryforward
- Carrying this year's amount over to later years
- National Tax Agency (NTA): NTA: No. 5762 Carryforward deduction of net operating losses
This article summarizes and explains materials published by government agencies and is not advice on any individual case. Rules can change, so for actual procedures and decisions always check the latest original materials and consult professionals such as tax accountants or labor and social security attorneys. English, Simplified Chinese and Traditional Chinese versions are translations prepared from the Japanese articles for convenience. If anything differs, the Japanese text and the original source take precedence.