My small business had a net operating loss. Can I deduct that?
April 4, 2010
Article in the IndyStar April 4, 2010
Hardly anyone goes into business to lose money. However, changes in the law last year allow owners or partners of eligible small businesses, rental properties and farms to deduct net operating losses (or NOLs) for up to five years, when expenses and-or deductions exceed gross income. Such a refund could be a boon for cash-strapped businesses.
Bill Wendling:
Individuals enter into a business for various reasons with profit potential often being a primary motive.
While no one likes to lose money in a business, the losses a business generates can be used to ease your tax burden.
Specifically, net operating losses from small businesses can be used to offset income earned from other sources and may even be used to offset profits from the same business in prior or future years.
As always, it is important that you or your tax preparer stay up to date on the deductibility of tax losses because the laws can be complicated and often change quickly.
For example, the economic-stimulus package passed in February 2009 allowed small businesses filing their 2008 tax return to carry back net operating losses for up to five years (the typical period was two years).
While this law was set to expire last year, eligible individuals have until Oct. 15, 2010, to take advantage of this change. There are also provisions that allow such losses to be carried forward for up to 20 years.
Hobbyists beware. Some small-business owners might run into a problem though if they are treating their hobby as a small business.
If you want to deduct losses from a hobby that has been turned into a business, it is important that your business is profit-driven and that you are not deducting losses from a Beanie Baby binge gone wrong.
