On the last post, we discussed the other tax benefit of operating a home based business: taxpayers are able to avail additional tax deductions that may not be available for employees.
Some of these are expenses that these individuals may be spending already but unable to deduct because they are working for someone else.
On this post, we will be discussing how a home-based business can help you reduce the tax liability if your business incur losses. And these may be applied towards the returns that you have filed previously, meaning you can get additional refunds from prior year tax returns!!!
What are business losses?
Business losses happen when your business expenses exceed your business income. Nobody wants to have losses but sometimes these things happen. People go into business to make money not to lose money. However, sometimes losses are unavoidable and there are some losses that are beyond your control. The good thing about losses is that these may qualify as tax deduction on your tax return, which can be applied to offset the tax liabilities from prior year returns and even future year returns. If you and your spouse has salary and wages as employees, you may be able to offset your losses against your non-business income provided that you are filing your business income with the Schedule C ( usually used by sole proprietorship, or LLC and S-corporation for single-member only if the election is made). Business losses from a corporate return will be deducted on the corporate business returns and not on your personal income tax return.
Carryover of Losses – Back and Forward
Carryover of losses are one of the good tax breaks for business owners. The main idea of the carryover is to give the businesses the full “benefit” of their losses by letting them reduce their taxable income and lower their tax liabilities in years where they didn’t suffer any losses. This means that potentially business owners can get additional tax deductions and refunds on the previously filed tax returns.
- Carryback Period – Generally, when you have a business loss at the end of the year, then you have to carryback all the “loss amount” to the two prior tax years. In some special cases, you may be able to carryback longer than two years if the losses meet certain requirements. The carryback period could be 3, 5 or even 10 years. The new ARRA tax code also has additional information on the extension of carrybacks for qualified small business owners.
- Carryforward Period - If there’s any leftover losses after the carryback period, you can carryforward the balance for up to 20 years after the year that filed the losses. You can’t deduct any part of the losses after the carryforward period.
- Waiving the Carryback – You can waive the carryback period and use the all the losses for the carryforward period only. This may be beneficial if your taxable incomes in the “carryback years” were low or if you anticipate to have larger taxable income after the “Loss” year. Remember, if you do not choose to waive, you MUST carryback your losses first before you can carryforward.
Photo credit: Maistora
My husband owns his own business and I’m able to deduct any losses or expenses off of my own personal income on a Schedule C since we file jointly and his business is a “sole proprietor” business. It really reduces our taxes overall.
Little House, it’s nice to know a fellow blogger who takes advantage of this particular tax breaks.
Nice article, I’ll have to get better organized next year! Perhaps I can do my taxes a bit better
this is a good side-effect, and it may help your business stay afloat in the first few years, but it is not something you want to get used to or count on.
That is very true. Nobody wants to run at a loss as we go into business to make money not lose money. But in case a loss ever come up, it’s good to have this kind of tax breaks to recoup some of them.