No profit in 3rd business year

[Gdrapes]

Due to Covid shutdowns and slowing business I didn't have a profit in my 3rd year in a row. I wasn't able to write off any of my business expenses. Will I be able to carry those expenses over to the next year? I'm not sure if I will have a profit this year due to my debts growing without any relief from my taxes. I don't want to make any more debt and go threw the same situation.

[johnd84]

Hi Gdrapes,

Thanks for your question. As long as you report everything on each year's tax return, your losses will carry forward and you can offset profit in future years to reduce your taxes in those years. Here are the IRS guidelines on this but the short version is you won't lose the ability to use those losses. IRS carry forward rules 

[Kimberly F]

The ability to carryover a business loss to other tax years can be different depending on the type of entity.

If you are a sole proprietor, filing Schedule C on your Form 1040, a business loss reduces your other taxable income (wages, retirement, social security, other income) in the same tax year.  You could have a carryback/carryover if you had an actual Net Operating Loss (NOL) (negative taxable income before considering personal exemptions). If you have a NOL in a tax year, you must carry back the entire amount of the loss to 2 prior tax years, and then carry forward any remaining loss up to 20 years after the current tax year. You can also choose not to carry back the loss and only carry it forward.

If your business is a partnership or S Corporation, the rules regarding net losses can be more complicated.  The allowed loss is affected by your basis in the partnership or S Corp, the amount of investment you have "at-risk", and the amount of distributions you have taken to date.

In any case, you will not lose the deductions in a tax year where you had a loss.  A sole proprietor can use those losses by either carrying the loss back or forward as noted above.  Any suspended losses incurred by an S Corp or Partnership may be limited or suspended but can be deducted in full when the you sell your interest in the business.

[Mike9241]

the expenses need to be reported on the return for the year paid (assuming you use the cash basis for reporting).  then you have to see if you have a net operating loss. it can be calculated using schedule A on form 1045. An NOL incurred in 2021 can only be carried forward.

Turbotax does not calculate the NOL. if you do not have an NOL (it's possible to have a loss on Schedule C) but not have an NOL, there is no loss to carry forward to 2022

an issue that the IRS could raise s the hobby loss issue  IRC 183. simply put without profits in 3 out of 5 years ending with the current tax year, the IRS could question if the activity is truly engaged in for profit. should you fail to prove it, income would be taxable while most expenses would not be deductible,   thus you could end up losing NOL carryforwards. 

this is a situation you may want to discuss with a tax pro.