How Business Losses Affect Your Personal Return

How Business Losses Affect Your Personal Return

Running a business comes with ups and downs, and some years you may spend more than you earn. The good news? Business losses can often help reduce your personal tax bill. Understanding how losses flow through to your personal return can help you take advantage of valuable tax savings and avoid surprises.

Your Business Structure Determines How Losses Flow Through

Not all businesses handle losses the same way. The way your loss impacts your personal tax return depends on your entity type.

Sole Proprietorship or Single-Member LLC

Losses pass directly to your personal return on Schedule C.
You can use these losses to reduce other income, such as:

• Wages
• Investment income
• Freelance income
• Rental income

Partnership or Multi-Member LLC

Your share of the business loss appears on a Schedule K-1, and then flows through to your individual return.
Your deductions may depend on your basis in the company and your level of involvement.

S Corporation

Losses also pass through to shareholders via Schedule K-1, but you can only deduct losses up to your stock basis and debt basis. Additional limitations may apply.

C Corporation

C corporation losses do not pass through to your personal return. They stay at the corporate level and may offset future corporate profits.

Can Business Losses Reduce All Your Income?

In many cases, yes — but some rules limit how much of a loss you can claim.

1. At-Risk Rules

You can only deduct losses up to the amount you have “at risk” in the business.
This includes:

• Money you invested
• Certain business loans you are personally responsible for

2. Passive Activity Loss Limits

If you’re not actively involved in running the business, losses may be considered passive, and may only offset passive income.

3. Excess Business Loss (EBL) Limits

The IRS caps how much business loss you can use to offset personal income.
Any extra becomes a Net Operating Loss (NOL) and carries forward to future years.

Net Operating Losses (NOLs)

If your business loss exceeds your income, you may create a Net Operating Loss.
NOLs can’t be carried back, but they can be carried forward indefinitely to offset up to 80% of taxable income in future years.

This can be a powerful tool to reduce your taxes in more profitable years.

Documentation Is Essential

The IRS pays close attention to loss claims. To protect yourself, you should keep:

• Profit and loss statements
• Bank records
• Receipts and invoices
• Business plans
• Evidence of active participation

Good documentation ensures your loss deductions hold up during an audit.

Don’t Confuse Business Losses With Not Paying Taxes

A business loss can lower your tax bill, but it does not automatically mean a refund.
You must have other taxable income for the loss to offset.
If not, the loss simply carries forward.

Mytax.dog Can Help You Use Losses Strategically

Business losses can be confusing — but when used correctly, they can offer significant tax savings. Mytax.dog can help you determine how much of your loss you can deduct, whether you qualify for pass-through benefits, and how the loss affects your personal return.
We’ll make sure your return is accurate, optimized, and compliant.

Turn a challenging year into a tax advantage by letting Mytax.dog handle your filing.

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