Benefiting from Business Losses

If your business has suffered losses, make sure you take advantage of every allowable deduction. Net operating losses (NOLs) are generated when a company’s deductions for the tax year are more than its income. Under the Tax Cuts and Jobs Act of 2017, carrybacks of NOLs are no longer allowed, but an indefinite carryforward of NOLs is allowed. The current tax law also sets a limit on the amount of NOLs that a company can deduct in a year equal to the lesser of the available NOL carryover or 80% of a taxpayers pre-NOL deduction taxable income. Corporate capital losses are also currently deductible, but only to the extent of capital gains. A three-year carryback and a five-year carryforward period apply.

The CARES Act added a five-year carryback period for NOLs generated in a taxable year beginning after December 31, 2017 and before January 1, 2021. It also clarified that the 80% taxable income limitation equals 80% of the excess of taxable income that exceeds the amount of NOLs carried forward (prior to the Tax Cuts and Jobs Act) to any taxable year beginning after December 31, 2020.

If your business is not incorporated or operates as a partnership, S corporation, or LLC, you may deduct business losses on your personal tax return. But, losses may be limited because of the at-risk or passive activity loss rules. Keep in mind that you can only deduct your share of losses to the extent that you have sufficient income tax basis for your investment.

Also, take advantage of other possible loss deductions. You may deduct all or some bad business debts as ordinary losses when your good-faith collection efforts are unsuccessful. Inventory losses, casualty and theft losses (to the extent they are not covered by insurance), and losses from a sale of business assets may also be deductible.