Utilizing losses: Carryforwards and carrybacks in corporate tax strategy under the tax laws

By Enoch AKUFFU-DJOBI (PhD)

 In today’s challenging business environment, companies often face fluctuations in their profitability. While businesses strive for steady growth, it is not uncommon for them to incur losses in some years.

Fortunately, Ghanaian tax laws provide tools to help companies mitigate the impact of these losses: carryforwards and carrybacks. These provisions enable companies to offset losses against profits in other periods, reducing their tax liabilities and improving cash flow.

This article explores the concept of tax loss carryforwards and carrybacks in the context of Ghana’s tax regulations, demonstrating how businesses can leverage these strategies for tax optimization.

What Are Carryforwards and Carrybacks?

In basic terms, carryforwards and carrybacks are mechanisms that allow businesses to use tax losses incurred in one year to offset taxable income in other years. While these tools are available in many tax jurisdictions, it is essential for businesses operating in Ghana to understand how these provisions work within the country’s tax framework.

• Carryforward: This allows a company to apply its current year’s tax loss to future years’ taxable income, reducing its tax liability in those years. In other words, a loss is “carried forward” and used to offset profits in the following years.
• Carryback: This allows a company to apply a tax loss to its profits from previous years. This often results in a tax refund for taxes paid in those prior years, providing businesses with immediate liquidity. However, it is important to note that Ghanaian tax laws do not currently permit loss carrybacks, meaning companies cannot apply losses to previous years’ taxable income.

Carryforwards Under Ghanaian Tax Law

Under Ghanaian tax law, businesses are permitted to carry forward their tax losses. This provision is particularly valuable for businesses that experience cyclical downturns or for startups that may incur losses in their initial years of operation.

According to the Income Tax Act, 2015 (Act 896), a company is allowed to carry forward losses for up to five consecutive years. This means that a company can apply its tax losses to offset taxable income in the following five years, which can help reduce the overall tax burden when the business becomes profitable.

For instance, if a company incurs a loss of GHS 500,000 in Year 1, it can carry that loss forward and use it to offset taxable income in the following years, such as Year 2, Year 3, and beyond, until the full amount is utilized or the five-year limit expires.

Strategic Benefits of Loss Carryforwards

Tax Deferral: Carryforwards allow businesses to defer their tax liabilities to future years. This can be beneficial if the company expects to have higher profits in the coming years. By offsetting future profits with previous losses, the company can reduce its overall tax liability during profitable periods.

Smoothing Cash Flow: For companies that may face temporary downturns or startups in their early stages, utilizing carryforwards can help smooth out cash flow. By deferring tax payments until the company returns to profitability, businesses can allocate more resources toward operations, growth, and innovation.

Long-Term Financial Planning: For businesses in sectors where profitability is cyclical, such as agriculture or construction, carryforwards offer a way to balance out profits and losses over a number of years. This helps companies manage their financials and tax obligations more efficiently.

The Limits of Carryforwards in Ghana

While the opportunity to carry forward tax losses can be a valuable tool, businesses must keep in mind the limitations imposed by Ghanaian tax law:

• Five-Year Limit: As mentioned, the losses can only be carried forward for a maximum of five years. After this period, any remaining unutilized losses are forfeited and can no longer be applied to future taxable income.
• Losses Must Be Related to Business Operations: Losses that a business wishes to carry forward must be from the business’s regular operations. Losses arising from capital gains or other non-operational activities may not be eligible for carryforward.

How to Utilize Carryforwards Effectively

To maximize the benefits of loss carryforwards, companies should adopt a strategic approach to tax planning. Here are a few steps to help businesses effectively use this provision:

Track Losses Carefully: Maintain detailed records of tax losses, as accurate tracking is essential to ensuring that the full benefit of carryforwards is realized. This includes documenting the amount of loss each year and the taxable income to which the loss will be applied.

Plan for Future Profits: Since losses can only be carried forward for five years, businesses should plan for future profitability to ensure that losses are utilized within this time frame. A business that anticipates future growth can apply losses strategically to lower its tax obligations when profits are higher.

Consult with Tax Professionals: Navigating tax laws can be complex, especially when dealing with carryforwards. It is essential for businesses to consult with tax professionals or accountants familiar with Ghanaian tax regulations. Tax experts can help ensure compliance, maximize deductions, and avoid common pitfalls in tax planning.

Impact of Carryforwards on Corporate Tax Strategy in Ghana

In the context of Ghana’s tax landscape, tax loss carryforwards are an essential tool for corporate tax optimization. For businesses operating in industries that are subject to market fluctuations, such as agriculture, manufacturing, or technology, the ability to offset future profits with past losses provides a crucial safety net.

Additionally, for newly established businesses or those going through temporary downturns, carryforwards allow companies to postpone tax payments until they return to profitability, fostering sustainability and financial stability.

While carrybacks could have further enhanced tax liquidity by offering immediate refunds, the absence of this provision in Ghana means that businesses must plan carefully to ensure that they use carryforwards within the five-year period.

Conclusion

In Ghana, the opportunity to utilize tax loss carryforwards is a key strategy for businesses looking to manage their tax liabilities effectively. By understanding the rules surrounding carryforwards and developing a proactive tax strategy, companies can reduce their tax burden and optimize their cash flow during periods of financial difficulty.

With a maximum carryforward period of five years, businesses must carefully track and plan the use of their losses to ensure they get the maximum benefit. Consulting with tax experts and adhering to Ghana’s Income Tax Act will ensure that companies are compliant while making the most of this valuable tax provision.

Ultimately, tax loss carryforwards offer businesses in Ghana a powerful tool to manage profits and losses, contributing to long-term financial success and stability.

(Enoch is a Chartered Accountant / Certified Banker with a deep passion for accounting, banking, and governance. His expertise spans both education and practice reflecting a commitment to research and knowledge sharing. He can be reached via [email protected]). Contact: 233244201383.

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