Valuation of Tax Loss Carryforwards

30 Pages Posted: 13 Jan 2012

See all articles by Sudipto Sarkar

Sudipto Sarkar

McMaster University - Finance & Business Economics

Date Written: January 12, 2012


Tax loss carry-forwards are a valuable asset because they reduce a company’s future tax payments. However, there is often a great deal of uncertainty regarding the probability and timings of these tax savings. We propose a contingent-claim model to value this asset. The value is determined primarily by the size of accumulated carry-forwards relative to earnings. We show that, for poorly-performing firms with large tax loss carry-forwards, (i) the realizable (or fair) value of the tax losses can be significantly smaller than the book value, and (ii) the tax losses can account for a significant fraction of the company’s equity value. The model is illustrated by calibrating it to a couple of companies with large carry-forwards. Finally, we show how the model can be used to compute the marginal tax rate of a company with carry-forwards.

Keywords: Tax loss carry-forwards, Net operating losses, Valuation, Contingent-claim model

JEL Classification: G3

Suggested Citation

Sarkar, Sudipto, Valuation of Tax Loss Carryforwards (January 12, 2012). CAAA Annual Conference 2012. Available at SSRN: or

Sudipto Sarkar (Contact Author)

McMaster University - Finance & Business Economics ( email )

School of Business
1280 Main St. W.
Hamilton, ON L8S 4M4
905-525-9140 (Phone)
905-521-8995 (Fax)

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