Understanding Business Loss Deductions on Your Tax Return
By Tax&Facts | Published on | Read: 3 Mins
In the U.S., the amount of business loss that can be deducted from your income before filing taxes depends on whether the loss is categorized as a business loss or a capital loss, and whether the business is classified as a sole proprietorship, partnership, LLC, or corporation. Here's a breakdown:
1. Business Losses (Net Operating Loss - NOL)
Sole Proprietors, Partnerships, and LLCs (pass-through entities)
If your business operates as a sole proprietorship, partnership, or an LLC that is treated as a pass-through entity, the business loss can generally be deducted against other income (like wages, salary, or investment income). This is called a Net Operating Loss (NOL).
NOL Carryforward
You can carry forward any remaining NOL to offset future taxable income.
NOL Carryback
As of recent tax law changes (Tax Cuts and Jobs Act), businesses can no longer carry back NOLs (except for farming losses) but can carry them forward indefinitely. However, NOLs generated after 2020 can only offset up to 80% of taxable income in a future year.
Corporations
If your business is structured as a corporation, the loss is generally carried forward to offset future corporate taxable income (subject to certain limitations).
2. Limitations on Business Loss Deductions
Excess Business Loss Limitation (for Individuals)
For tax years 2018–2025, the Tax Cuts and Jobs Act introduced limits on the amount of business losses an individual can deduct:
- For single filers: $518,000 (for 2023)
- For married filing jointly: $1,036,000 (for 2023)
If your total business losses exceed this threshold, the excess is carried forward as an NOL.
3. Deducting Business Losses
Sole Proprietor / Individual Tax Filers
You can deduct your business losses on Schedule C (Profit or Loss from Business), and the loss will flow through to Form 1040. The business loss will reduce your taxable income, potentially resulting in a refund if you have overpaid taxes through withholding or estimated payments.
Partnerships / LLCs
Business losses in partnerships or LLCs are passed through to individual members or partners and reported on their personal tax return.
In short, you can deduct business losses from your income, but there are rules and limits depending on your filing status, the type of business, and how large the loss is. If your loss is substantial, it may be carried forward to future years to offset future taxable income.
Summary of Losses and Carryforward in LLCs
| Scenario | Loss Deduction Process | Carryforward Process |
|---|---|---|
| Sole Proprietorship (Single-Member LLC) | Loss is reported on Schedule C. Losses offset other personal income (Form 1040). | If loss exceeds income, it can be carried forward under Net Operating Loss (NOL) rules. |
| Partnership (Multi-Member LLC) | Losses are passed through to partners via Schedule K-1. Partners deduct their share of losses on their personal returns (Form 1040). | If partner’s share of loss exceeds their income, the excess can be carried forward under NOL rules. |
| C Corporation (LLC electing as C Corp) | Losses are retained within the corporation. Shareholders cannot deduct business losses. | Losses can be carried forward by the corporation to offset future corporate income. |
| S Corporation (LLC electing as S Corp) | Losses are passed through to shareholders via Schedule K-1. Shareholders deduct their share of losses on their personal returns. | Shareholders can carry forward excess losses under NOL rules. |
FAQ Frequently Asked Questions (FAQ)
Q1: Can I deduct business losses from my personal income?
A1: Yes. If your business operates as a sole proprietorship, partnership, or
pass-through LLC, you can generally deduct business losses from other income like
wages or investment income. This is reported on your individual tax return using
Schedule C or K-1.
Q2: What is a Net Operating Loss (NOL) and how does carryforward
work?
A2: A Net Operating Loss (NOL) occurs when your business deductions exceed income.
You can carry forward the NOL to offset future taxable income. Under current tax
law, NOLs from 2021 onwards can offset up to 80% of taxable income and can be
carried forward indefinitely.
Q3: What are the limits on deducting business losses for
individuals?
A3: The Tax Cuts and Jobs Act limits the amount of business loss that individuals
can deduct. For 2023, the maximum deductible loss is $518,000 for single filers and
$1,036,000 for joint filers. Losses beyond these limits must be carried forward as
NOLs.
Q4: How are losses handled differently in various business
structures?
A4:
- Sole Proprietorship: Loss is reported on Schedule C and reduces personal taxable income.
- Partnerships/LLCs: Losses pass through to partners/members via Schedule K-1 and reported on their individual tax returns.
- C Corporations: Losses are retained and carried forward by the corporation; not deductible by shareholders.
- S Corporations: Losses pass through to shareholders and can be deducted personally.
Q5: Can business losses lead to a tax refund?
A5: Yes. If business losses reduce your taxable income significantly, and you’ve
overpaid taxes through withholding or estimated payments, you may be eligible for a
refund. Excess losses not used in the current year can be carried forward to reduce
future taxes.
Article History
v1.0 (May 19, 2025): Initial publication of the article
