Building Your Business Business Taxes Claiming Business Losses on Your Tax Return By Jean Murray Jean Murray Facebook Twitter Jean Murray, MBA, Ph.D., is an experienced business writer and teacher who has been writing for The Balance on U.S. business law and taxes since 2008. She has taught accounting, business law, and business finance at business and professional schools for over 35 years, has authored several books on saving money and simplifying your business, and was the owner of startup-focused company Emence Enterprises, LLC. learn about our editorial policies Updated on September 13, 2022 Fact checked by Taylor Tompkins Fact checked by Taylor Tompkins Twitter Website Taylor Tompkins has worked for more than a decade as a journalist covering business, finance, and the economy. She has logged thousands of hours interviewing experts, analyzing data, and writing articles to help readers understand economic forces. She joined The Balance in 2022 as its Economics Editor. learn about our editorial policies In This Article View All In This Article How Business Losses Are Limited How Excess Loss Rules Work Tax Loss Carry Forward Rules Calculating and Reporting Business Losses Limitations on Capital Losses Getting Help With Business Losses Frequently Asked Questions (FAQs) Photo: Mark Edward Atkinson / Tracey Lee / Getty Images A bad year for your business may result in a loss, but you may be able to get some benefit from your business loss by using it to offset your personal income from other sources. The amount of the loss you can take may be limited by several factors, including your risk in the business and the amount of the loss. This article explains how business losses affect your personal tax situation and how to claim those losses on your tax return. Key Takeaways Limits on business losses affect businesses that pay their business tax through their personal tax return.Corporations can take a business loss, but it doesn't affect shareholders' taxes.Business owners who have limited or no risk or who don't participate in running the business may have limits on their business loss for tax purposes.If your loss is over the limit for one tax year, you may be able to carry forward all or part of that loss to reduce taxable income in future years. How Much Loss Can a Business Take? Businesses that are organized as sole proprietors, limited liability companies (LLCs), partnerships, and S corporations can take business losses on their personal tax returns. Loss limits don't apply to corporations. A business loss for the year from operations is called a net operating loss. The Internal Revenue Service (IRS) imposes limits on business losses in several situations. Before you determine if you can take the full amount of the allowable business loss, you must first apply at-risk rules followed by passive activity rules. At-Risk Rules At-risk rules limit your losses from business to your amount at risk in the activity. These at-risk limits apply to partners and S corporation shareholders and certain closely-held C corporation owners who are carrying on a trade or business for profit. You'll need need to use IRS Form 6198 to compute and report your at-risk situation. Passive Activity Rules Passive activity rules also limit business loss deductions. Passive activity relates to a business owner who does not participate in their business on a regular, continuous, or substantial basis. In other words, this person is an investor or a shareholder but isn't active in the business. Passive activity rules apply to rental activities, even if the owner actively participates in the business, unless they are a real estate professional. Losses resulting from passive activity can only be deducted up to the amount of income from that business. Note The passive activity rules don't apply to Airbnb hosts or hosts on another home-sharing service if they rent out all or part of their home for more than 14 days or 10% of the days they rented at fair market value during the year. How Excess Loss Rules Work The excess loss rule kicks in when your total business deductions are more than your total gross income from your business, above a threshold amount of $262,000 for a single taxpayer or $524,000 for a joint tax return, beginning in 2021 and going forward. To say it more simply, any loss of more than $262,000 (single taxpayer) or $524,000 (joint return) is considered excess and that excess amount can't be taken as a loss on your tax return for the year. Tax Loss Carry Forward Rules If your business loss is limited for one year by the excess loss rules, you may be able to carry over all or part of the excess loss to a future tax year. Beginning with 2021 taxes, the provisions of the 2017 Tax Cuts and Jobs Act for tax loss carry-forwards are returned in full. The tax loss carry-back is no longer available. You can still carry a business loss forward to future tax years, but you can no longer carry a net operating loss back to past years. The amount you can carry forward is limited to 80% of taxable income, but you can go forward for an unlimited number of years. Tax loss carry-forwards are not available to corporations. Calculating and Reporting Business Losses To calculate the amount of the loss, you add your business income and subtract business expenses on your business tax return. If your deductible expenses are greater than the income, you have a loss, and you can start the process of calculating a net operating loss (NOL). To run this NOL calculation, you can take some deductions in full, like rent or office expenses. Other deductions, such as depreciation or home business costs, are limited. Use IRS Form 461 to calculate limitations on business losses and report them on your personal tax return. This form gathers information on your total income or loss for the year from all sources. You subtract out the business loss and compare it to the excess loss limits to see if your losses will be limited. Note Form 461 has been through some changes over the last few years. Make sure you have the correct year for this form. Look for the year in the top right corner of the form. Limitations on Capital Losses Capital gains and losses are different kinds of losses a business may have on the sale of capital equipment and investments, like machinery, vehicles, or buildings. These losses are handled differently from operating losses for tax purposes. There's a limit on the amount of capital loss you can claim. If your capital losses are greater than your capital gains, you can claim the excess loss if it is the lesser of $3,000 ($1,500 if married filing separately) or your total net loss on Form 1040 Schedule D. Getting Help With Business Losses The IRS has helpful articles on business loss subjects. Note Because IRS regulations on business losses can be complicated, check with a licensed tax professional if you think you might have a business loss for the year. This is one part of your business tax return you don't want to tackle on your own. IRS Publication 925 has details on at-risk rules and passive activity. See the IRS article on Capital Gains and Losses for more information on capital losses. Frequently Asked Questions (FAQs) How much business loss can I claim on my taxes? For tax years beginning in 2021 and continuing into future years, you can take a loss up to $262,000 if you are an individual or $524,000 for a joint tax return. But each business is different and the amount of business loss you can claim on your tax return depends on your business type, the amount of risk you have in your business, and other factors. Can I deduct business losses from personal income? You may be able to deduct business losses to offset personal income, depending on the amount of the loss and other restrictions. Personal (nonbusiness) income includes earnings from employment, Social Security benefits, and investment gains or losses. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Internal Revenue Service. "Publication 925, Passive Activity and At-Risk Rules." IRS. “Form 6198.” IRS. "Excess Business Losses." IRS. "The Highlights of Tax Reform for Businesses." IRS. "Topic No. 409 Capital Gains and Losses." Internal Revenue Service. "Excess Business Losses." Internal Revenue Service. "Net Operating Losses."