How to Write Off a Business Investment Loss
Individuals who file their federal income tax forms can write off business investments that result in financial loss. These business write-offs may reduce or eliminate the amount of tax owed. Documentation of reasonable business expenses is necessary to complete the required income tax forms. Business expenses must be allocated to specific accounts such as depreciation and travel, using currently accepted accounting principles.
- Difficulty:
- Moderately Challenging
Instructions
Things You'll Need
- Instructions for Schedule C
- Instructions for Form 1040
- Instructions for Form 1065
- Instructions for Schedule SE
- Form 1040
- Schedule C
- Form 1065
- Schedule SE
- Tax Guide for Small Business (Publication 334)
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Instructions
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1
Determine whether your business investment requires you to file Schedule C or Form 1065 with your Form 1040. Profit or loss from businesses that are sole proprietorships require completion of Schedule C for Form 1040. For certain partnerships and joint ventures, Form 1065 is required.
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2
Obtain your required tax forms, along with instructions for completion, from the Internal Revenue Service by mail, electronically, or from your tax professional. Forms are specific for the tax year that the business investment loss occurred.
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3
Complete your business tax form. If you are using Schedule C, you first must provide your name, Social Security number, business name, type of business, address, and accounting method used. In Part I, fill in the gross income earned by the business. In Part II, list your business expenses. The final section of the form is where you calculate totals and your profit or loss for the accounting year.
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4
Enter your business losses on line 12 of your Form 1040. Complete the 1040, calculating your personal income tax. Your business loss reduces your adjusted gross income, thereby reducing your tax liability.
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5
Attach your completed Profit or Loss from Business form to the back of your 1040. Note that the IRS requires assembly of tax forms in specific orders. Schedules, for instance, are placed in alphabetical order.
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6
Sign and mail your tax forms to the IRS tax-processing center for your state of residence. Or, file your forms electronically.
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1
Tips & Warnings
Remember that you must attach your completed Schedule C or Form 1065 to your completed Form 1040. You may also need to complete and attach Schedule SE, for self-employment tax, if applicable to your business situation.
Another useful aid for this process is the IRS' Tax Guide for Small Business (Publication 334).
Underestimating your deduction may cause you to pay income tax that you do not owe.
Overestimating your deduction may result in penalties and fines, so consult a tax professional if you are unsure.
