Tax losses are created when allowable deductions exceed taxable income. The accounting standard envisages that there are three possible treatments for tax losses – they may be ‘carried forward’, ‘carried back’ or simply lost. Where taxation legislation allows tax losses to be carried forward and deducted against future taxable profits, the carry forward may be either indefinite or for a limited number of years.
Additionally, other restrictions may apply such as requiring losses to be deducted against exempt income on recoupment. Carry forward tax losses create a deductible temporary difference and hence a deferred tax asset in that the company will pay less tax on future taxable profits.