How to Claim Losses From a Small Business on Taxes

How to Claim Losses From a Small Business on Taxes
••• claudiodivizia/iStock/Getty Images

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.