Those of you who run a small business know that it isn’t all black ink. You are bound to experience a loss hopefully later than sooner. The good news is it does not have to be a complete hit to your wallet. Below, we will show you how to claim a small business loss on your taxes.
1. Determine the Type of Small Business Loss
There are many types of business losses. However, they fall into two categories:
The first is known as a net operating loss. This is a general term for a business whose expenses exceeded their income. For example, if your business took in $1 million in all total income in one year but spent $1.1 million to make that in the same year, it is operating at a $100,000 or 10% net operating loss for that particular year. In most cases, you may only claim up to 80% of the loss.
The second most common type of business loss is the capital loss. This is one a large asset of a business is sold for less than the original purchase price. However, this does not apply for items that are expected to decrease in value, such as a company vehicle. But this does count for any investments the business made in hopes of turning a profit. This includes stocks, bonds, funds, and other forms of investments.
Did you know? Over 45 million people filed individual returns with business attributes in 2021? Source: IRS
2. Collect Other Business Losses
These types of expenses can include a host of normal operating expenses associated with your business such as:
- Advertising and marketing, whether online, in person, via mail, or other.
- Costs for workers including full time, part time, contractors, and freelancers.
- Insurance on property, auto, health, life, and others.
- Interests on any type of loan for your business, including credit card interest.
- Cost of goods sold.
- The cost to operate necessary equipment, including any HVAC system.
And many others as allowed on the appropriate tax schedule, usually Schedule C.
Did you know? Texas is home to the most small businesses in the nation with approximately 10% of all of them? Source: USA Today
3. File Your Businesses Losses Properly When Preparing Your Tax Return
Calculate your total income by adding up all sources of revenue and subtracting credits and deductions. Complete the appropriate tax form/schedule for your business type and enter the net loss on Schedule 1 of Form 1040, there is a different form for seniors. Additionally, you must complete IRS Form 461 Limitation on Business Losses to total all the types of losses from your business including net operating losses, capital losses, and others.
Have a Bookkeeper Claim a Small Business Loss on Your Taxes
Unfortunately, it can be very difficult to accurately claim a small business loss while maximizing your final tax tally. We highly recommend you use the services of an experienced bookkeeper in your area to assists. Those of you located in the Houston area may Feel free to contact us at 281-894-6494 to schedule an appointment for help.
