José and Alicia, both sole proprietors, have experienced the following results during the past three years:
Profit (or Loss) |
||
Year |
José |
Alicia |
2010 |
$50,000 |
$150,000 |
2011 |
60,000 |
60,000 |
2012 |
60,000 |
(40,000) |
Although José and Alicia have the same profit of $170,000 over the period from 2010 to 2012, the finality of the annual accounting period concept places Alicia at a definite disadvantage for tax purposes. The net operating loss procedure offers Alicia some relief by allowing her to apply some or all of her 2012 loss to the earlier profitable years (in this case, 2010). Thus, with a net operating loss carryback, Alicia is in a position to obtain a refund for some of the taxes she paid on the $150,000 profit reported for 2010.