A carryback is the application of a tax loss to any prior years in which a taxable profit was earned. The concept is used to earn an immediate tax refund from the Internal Revenue Service, thereby recovering taxes paid in prior years. In essence, application of the carryback has the same effect as though the company had overpaid its taxes in prior years.
The concept only applies to the previous three years of results. Any residual amount of the tax loss that is not used in this manner is then carried forward, to be applied against any taxable profits in future years. A carryback is more valuable than a carryforward, since a carryback results in the immediate return of cash via a refund, while the positive impact of a carryforward may not be felt for many years.