Business loss

[Theoneandonlysm]

This year and next year, I will likely have a business loss for a reduced revenue.

I file as a sole proprietor on a schedule C. Will I be able to deduct all my losses (meaning that it will continue to deduct even into my adjusted gross income) or is there a limit as to how much business loss I can claim each year?

Can I carryover unclaimed losses into next year? 

[Katherine S 63]

Great question!!

First, I want to give you some of my favorite Self Employment links.  You might find these helpful.

Self employment tax

Self employment tax hub with calculator

Self Employment income and expenses

If your expenses are more than your income, the difference is a net loss. You usually can deduct your loss from gross income on page 1 of Form 1040 or 1040-SR. But in some situations your loss is limited. See Publication 334, Tax Guide for Small Business (For Individuals Who Use Schedule C) for more information.

Here is a copy of that publication:

https://www.irs.gov/pub/irs-pdf/p334.pdf

You can have a loss 3 out of 5 years.  If you have a loss more than that, then your business might be considered a hobby.  FYI

Thanks for the great question!!

Katie S

[rschule1]

Hi there:

You can claim all ordinary and necessary business expenses regardless of loss.  However, some items like office in the home deduction or section 179 deprecation could be limited by business loss. If losses are significant enough to absorb other income like wages then its possible that a net operating loss could be carried carried forward for future tax benefit.

[kfenwick]

Hello,

If you do not materially participate in the operation of the business, the losses could be subject the the Passive Activity Loss limitations where your passive losses can only offset other passive income.

If you do materially participate and actively involved in the business operations, the passive loss rules do not apply. 

In 2017, the Tax Cuts and Jobs Act (TCJA) passage created a provision limiting the extent to which loss can offset income. To put it in simpler terms, you cannot deduct an excess business loss in excess of the threshold amount, and instead, that excess carries forward as a net operating loss, subject to NOL rules.

For 2022, the threshold amount is $270,000 ($540,000 if Married and Filing Jointly).