Tax Benefits From A Tax Loss

Read this tip to make your life smarter, better, faster and wiser. LifeTips is the place to go when you need to know about Business Tax Relief and other Tax Relief topics.

What is tax relief from a tax loss?

Tax Benefits From A Tax Loss Tip: Whenever you operate a business, you take the risk of incurring a loss. If this happens to you, the tax benefits you reap from a tax loss depends upon whether your business is incorporated or non-incorporated. It also depends upon whether you take an active part in the business operations, or are simply an investor.

Incorporated. In general, if your business is incorporated (a C corporation), the tax loss belongs to the corporation, not the shareholders. Your shareholders would get a tax break only in the year that your business closes or in the year they sell their stock at a loss. You will use IRS Form 1120 to report your business activities to the IRS.

Unincorporated. If you operate an unincorporated business such as sole proprietors, limited liability companies, partnerships, and Subchapter S corporations do, you can take advantage of tax loss benefits easily.

In general, you would take your business' operating loss and put it onto your individual income tax return. The operating loss is known as a NOL (net operating loss) and occurs when your business expenses and deductions are larger than your income sources.

Your NOL can be used to offset any other income you have received. This, in turn, will lower the total amount of income that is subject to tax. You cannot, however, decrease your income to below zero by using your NOL. If your total NOL was to decrease your income below zero, you would need to carry forward or carry back the unused NOL to previous periods.

See how this can offer you a tax relief? This is a simplified description of using an NOL to your tax advantage; it is best handled by a tax professional.

Investor. If you are an investor in a business that experiences an operating loss, you are not entitled to claim any tax benefit of an ongoing business. In simple terms, you can, claim a capital loss.

Of course, there are IRS tax rules and regulations that must be met regarding any tax loss you experience in your business. Here are two:

Tax Rules. You also will not be allowed to take (deduct) your tax loss unless you can show the IRS that you operate your business with a “profit motive” in mind. The IRS wants to see that you truly have a business and simply not a hobby. Otherwise known as the ‘hobby loss rule', the IRS must see you making a profit three out of five years in order to qualify your business venture as a true business.

For larger incorporated businesses, another tax rule that must be met is known as ‘at-risk rules'. This IRS tax rule states that you cannot deduct more than your economic investment in the venture. This is intended to target the investments known as ‘tax shelters'.

If you intend on carrying over your venture's net operating loss (NOL), you must notify the IRS of this. There are two ways for you to do this:

  • You will need to attach either IRS Form 3621 (Net Operating Loss Carry-Over). This form will show the IRS how much loss is left over after the first tax year.
  • Or, you can send a written statement along with your income tax return for the year of your tax loss.
  • IRS Publication 536 provides more information on the area of NOLs.



Nobody has commented on this tip yet. Be the first.


URL: (optional)


Not finding the advice and tips you need on this Tax Relief Tip Site? Request a Tip Now!

Guru Spotlight
William Pirraglia