I’m often asked by nervous new business owners if they can recover a tax refund for a business loss. Receiving a tax benefit from a business loss depends on the type of entity formed and whether the investment in the business is “at risk” in whole or in part. It also depends on the presence of other income.
Owners of a corporation are not taxed directly on business profits and losses because the corporation’s taxes are taxed separately. For other types of enterprises, business income and loss passes through to the owner’s personal tax return. These business types are:
- Sole proprietors and single-member LLCs that calculate business taxes on Schedule C; and
- Partnerships, S corporations, and multiple-member LLC’s that calculate business taxes on a partnership tax return.
Sole proprietors may deduct any loss a business incurs from other income for the applicable tax year, whether such income is from employment, investment, or a spouse (for joint returns). For LLCs, S corporations, or partnerships, any share of business losses are passed through from the business to the individual return of a member or partner and deducted from other personal income similarly to that of a sole proprietor. However, because C corporations utilize this business loss on their corporate tax returns, an individual shareholder may not.
A net operating loss may be calculated, using specific IRS methods, which may allow a tax refund. Net operating loss is calculated by using Adjusted Gross Income (AGI) and subtracting standard or itemized deductions. Net operating loss is calculated on Schedule A of IRS Form 1045. This form refers to a “Tentative Refund,” which requires a “loss carry back,” meaning that any loss is moved to a past or future tax year in which a profit was or may be realized.
At-risk rules limit losses from a business to the amount at risk in the activity. These limits apply to partners, S corporation shareholders, and certain closely-held C corporation owners. Business losses may be limited if they result from “passive activity,” which means a business in where the owner does not participate on a regular, continuous, or substantial basis. Losses resulting from a passive activity may only be deducted up to the amount of income earned. The law regarding both “at-risk” losses and passive activity losses are complex; the tax professionals at the Thorgood Law Firm may provide assistance in these areas.
Business enterprises don’t always earn a profit for a particular year, especially new businesses. Entrepreneurs in this situation may be able to obtain some tax relief. The tax professionals at the Thorgood Law Firm can help ensure that all business owners take advantage of all of the tax deductions, exclusions, and credits that may apply to them. If you are the owner of an enterprise doing business in the New York or Tri-State area and have any questions about available tax breaks to reduce your tax bill, call THE TAX EXPERTS at the Thorgood Law Firm www.thorgoodlaw.com. For a FREE consultation, call 212-490-0704.
