Claiming a business loss deduction

If you incur a business loss, you might be wondering if you can write-off the loss on your small business taxes. This article will explore what expenses count towards the business loss deduction, along with how to properly claim it. We’ll also briefly cover the excess business loss limitation.

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What is the business loss tax deduction?

The business loss deduction is the ability to deduct losses from a business from your other income. Claiming a business loss on taxes is possible if:

  1. You have two businesses
  2. You or your spouse have other income

Claiming a business loss on taxes also only applies to specific business entity types, which we’ll outline below.

Claiming a business loss on taxes

The rules for how to report business loss on taxes differ depending on your entity.

Sole proprietorships

Business losses are passed through to owners in sole proprietorships. To figure out a business loss as a sole proprietorship, fill out a Schedule C. You will enter the loss from Schedule C on Schedule 1, Form 1040 unless the amount you have invested in the business is not at risk. If the amount is not at risk, you will need to fill out Form 6198. You should also report the loss amount on your Schedule SE, which determines how much self-employment taxes you owe. All these forms are attached to your 1040 form, your individual tax return.

Pass-through entities

For business losses that occur with pass-through entities – such as S corporations, partnerships, and LLCs – the business owner’s share of business loss should be calculated on Schedule E and reported on your individual tax return, on Form 1040. The forms used to calculate loss vary depending on the entity type.

C corporations

If you own a C corporation, you can’t pass through your business’ losses to your personal tax return.

What is the excess business loss limitation?

Here’s a cautionary word of advice: there’s a cap to the amount of business loss you can deduct. This is known as the excess business loss limitation. The tax law has been modified a couple times since 2017, so the “when” of your business’ loss matters.

December 31, 2017 through December 31, 2026. Excess business losses are not allowed by non-corporate taxpayers. This rule was established by the Tax Cut and Jobs Act (TCJA) to go through 2025, but the American Rescue Act extended the time frame a year, through the end of 2026. 

January 1, 2018 through December 31, 2020. The above rule was suspended as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This means excess business losses can be deducted for tax years 2018 through 2020. A taxpayer whose 2018 losses were limited under this provision may amend their 2018 return to claim any loss disallowed under this provision.

Excess business loss limitation definition

It’s essentially when your total deductions for a tax year attributed to businesses is more than:

  • Your business’ gross income or gain for the tax year, plus
  • A threshold amount adjusted for inflation – in 2022 the amount is $270,000 for single filers and $540,000 for a joint return.

This rule limits the ability of non-corporate taxpayers to use business losses against other sources of income, such as wages and other compensation from sole proprietorships, partnerships (for shareholders), S corporations (for shareholders), and LLCs.

There are additional rules that may apply. If this situation applies to you, your tax pro can walk you through the details.

More help with claiming business loss on taxes

Claiming a business loss can be difficult to compute. For hands on guidance for complex tax form filing, get help from Block Advisors.

Our tax pros have the expertise to handle the most complicated small business taxes as well as your payroll and bookkeeping needs as well.

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