Can You Turn Business Losses Into Tax Relief?
Even well-run companies experience down years. The federal tax code may allow a bright strategy to lighten the impact. Certain losses, within limits, may be used to reduce taxable income in later years.
Who qualifies?
The net operating loss (NOL) deduction levels the playing field between businesses with steady income and those with income that rises and falls. It lets businesses with fluctuating income to average their income and losses over the years and pay tax accordingly.
You may be eligible for the NOL deduction if your deductions for the tax year are greater than your income. The loss generally must be caused by deductions related to your:
- Business (Schedules C and F losses, or Schedule K-1 losses from partnerships or S corporations),
- Casualty and theft losses from a federally declared disaster, or
- Rental property (Schedule E).
The following generally aren’t allowed when determining your NOL:
- Capital losses that exceed capital gains,
- The exclusion for gains from the sale or exchange of qualified small business stock,
- Nonbusiness deductions that exceed nonbusiness income,
- The NOL deduction itself, and
- The Section 199A qualified business income deduction.
Individuals and C corporations are eligible to claim the NOL deduction. Partnerships […]