How to Account for & Carry Forward Tax Losses on the U.S. 1040 Form

Carrying forward tax losses can lower taxable income in future years.

Individuals and businesses can carry forward losses for up to seven years to offset a high-profit year and lower taxable income. Consider the long-term consequences before choosing to carry forward a loss from one year to the next: Generally accepted accounting principles consider it a deferred tax asset.

Things You'll Need

• Form 1040
• Schedule D
• Capital Loss Carryover Worksheet
• List of assets

Instructions

1. 

   Report losses from investments and business activities on different IRS schedules.

   Determine whether the loss is from an investment, business, or consulting or contract work. Calculate the losses using the Capital Loss Carryover Worksheet. Report the loss from an investment or business on Schedule D of Form 1040. Report losses from consulting or contract work on Schedule C of Form 1040.

2. 

   Subtract the basis from the difference to calculate the loss.

   Calculate the loss amount of the assets if your losses are from an investment or business. An asset is anything you own and use for personal or business purposes, including stocks, bonds and a vehicle you use for business. Subtract the selling price from the basis cost to arrive at the loss amount. If the retail value of an asset is $10,000 and you sold it for $5,000, the loss is $5,000.

3. 

   A short-term or long-term loss depends on the term the asset was held.

   Count the number of days between the date you acquired and disposed of an asset to determine whether the loss amount represents a short-term or long-term loss. If you acquired and disposed of an asset within one year, consider it a short-term asset. If you acquired an asset and disposed of it more than one year later, consider it a long-term asset.

4. 

   Consider the risks of carrying forward a tax loss.

   Calculate the tax loss to carry forward using the Capital Loss Carryover Worksheet in IRS Publication 550. If you are married and filing jointly, you may claim up to $3,000 in capital losses when your losses exceed your capital gains. If you are married and filing separately, you may claim up to $1,500 or the amount on line 16 of your Schedule D. You may carry forward any amount over the limit for up to seven years.

   Businesses that claim capital losses should consider the consequences. A business with a negative profit and loss statement may appear to not be a good investment. However, if used properly, tax losses carried forward can reduce taxable income.

Tips & Warnings

• Businesses that claim a capital loss may have a negative profit and loss statement which would be unattractive to investors.

References

• Internal Revenue Service: Topic 409: Capital Gains and Losses
• Investopedia: Tax Loss Carryforward

Resources

• Internaal Revenue Service: Publication 505: Tax Withholding and Estimated Tax
• Internal Revenue Service: Publication 544: Sales and Other Dispositions of Assets