How to Claim Losses From a Small Business on Taxes

Small business losses can have potential tax benefits.

One of the primary benefits of a small business is the ability to write off financial losses on your taxes. Many people operate a small business on the side, and use the tax write offs to offset income earned from more conventional work. Claiming these losses reduces taxable income by the amount of the loss, thereby reducing the gross income figure used to calculate taxes owed.

Things You'll Need

• Pen
• Calculator
• IRS form 1040
• IRS form 1040 Schedule C

Instructions

Calculate Your Profit or Loss from Business

1. Obtain the proper IRS form. IRS form 1040 Schedule C has two required sections, and three sections for additional information. Complete the personal information section of Schedule C. Include your social security number or employee identification number.

2. Skip ahead to Section III of Schedule C. Calculate your cost of goods sold, if any, using the form provided.

3. Calculate your gross income from the year's business activities in Section I of Schedule C. Subtract your cost of goods sold from your total gross receipts or sales revenue. Add any other income to this figure. The result is your gross income.

4. Calculate your expenses in Section II of Schedule C. Enter the amount spent on each business activity listed in Section II. Add these expenses together to arrive at your total yearly expenses.

5. Subtract your total expenses from your total gross income. The result is your profit or loss for the year. If you have a loss, you may use the amount of your business loss to reduce your total income listed on IRS form 1040. This effectively reduces your total taxable income.

Tips & Warnings

• Each IRS-provided form and schedule has an accompanying set of complete instructions. Read the instructions for each form thoroughly before preparing your taxes.

• Tax law is complicated, and can easily be misunderstood. If you have any doubts during the process of completing your tax forms, contact the IRS help line at 1-800-829-4933. A certified tax preparer can also be of assistance.

References

• IRS form 1040 Schedule C
• IRS form 1040

Resources

• IRS form 1040 Schedule C Instructions