Claiming Losses from Your Small Business on Your Tax Return

If you are in the situation of incurring losses greater than the income of your business, the IRS does provide the means for some tax relief. Businesses that operate as sole proprietors, partnerships, limited liability companies (LLCs), and S corporations can claim business losses on their personal tax returns. The IRS, however, may limit the amount you can deduct depending on your situation. Thus, you probably need to work with a tax professional to ensure correct tax calculations.
As a sole proprietor, you may deduct any loss your business has been subject to, including investment income and even your spouse’s income. If your business is an S corp or LLC, your share of the losses pass through from the business to your individual return. You then deduct your losses from personal income. However, you cannot deduct C corporation losses on a personal return.
How Much Can You Deduct?
Under the Tax Cuts and Jobs Act (TCJA), individual taxpayers can deduct up to $250,000 a year, while married filing jointly filers can claim up to $500.000. The same limit applies to those involved with the qualifying forms of businesses mentioned above. You may also claim your losses above that amount in future years.
One piece of good news surrounding COVID was the passage of the Coronavirus Aid Relief and Economic Security Act (CARES ACT). This legislation made the rules more beneficial. The TCJA eliminated “carry backs” for net operating losses (NOL) and were subject to an 80-percent-of-income limitation. But under the new short-term rules, you can carry back for years 2018, 2019 and 2020, and you can now offset 100 percent of income earned during those years.
As we mentioned, this can get complicated. Thus, you should see a tax professional. For our clients, we provide unlimited complimentary tax planning advice. I suggest our clients who have business losses take advantage of this offer.
Professional Tax Services is a locally owned provider serving over 3,500 local residents and businesses. For more information call 661-259-1967 or visit www.protaxservices.com. Through their complimentary EZ2 Thrive program, they provide unlimited free tax planning advice to their clients.