How to Claim Losses From a Small Business on Taxes

by Madison Garcia ; Updated July 27, 2017
Close-up of business tax paperwork

If your business is set up as a sole proprietorship, partnership, S corporation or LLC, it most likely does not pay taxes on income. Instead, profits and losses flow through to the business owners. If your small business had a net operating loss, you can claim the loss on your individual tax return.

Business Losses

How you claim a business loss depends on the business form. Sole proprietors calculate business profits and losses on Schedule C of Form 1040. If business expenses exceed revenues, the owner has a net operating loss that offsets other sources of income on the 1040. Partnerships, S corporations and LLCs will issue owners a Form K-1 that details the amount of their business loss. As with a sole proprietor, this business loss offsets other income for the individual.

Carryback and Carryforward

Individuals can only use a business loss to the extent that they have income. For example, an individual with a $40,000 business loss and $30,000 of other income can only use $30,000 of the business loss. The excess $10,000 loss becomes a carryover. Individuals can apply the loss to previous tax returns or to future tax returns. A person may carry the loss back up to two years or carry the loss forward up to 20 years, depending on his needs.

About the Author

Based in San Diego, Calif., Madison Garcia is a writer specializing in business topics. Garcia received her Master of Science in accountancy from San Diego State University.

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