Tax Relief for Business Losses: What You Need to Know

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Business losses can be a difficult reality for many companies, especially during times of economic uncertainty or market disruption. However, the tax code does provide some relief for businesses that experience losses, which can help to mitigate the financial impact and make it easier to recover.
Here are some key things you need to know about tax relief for business losses:

1. Deducting business losses from your taxes

If your business experiences a loss in a given tax year, you may be able to deduct that loss from your taxable income. This can help to reduce the amount of taxes you owe, or even create a net operating loss (NOL) that can be carried forward or back to other tax years to reduce your tax liability in those years as well.

1. Types of business losses

There are two main types of business losses: operating losses and capital losses. Operating losses are losses that occur as a result of normal business operations, such as decreased revenue or increased expenses. Capital losses, on the other hand, occur when a business sells a capital asset (such as property or equipment) for less than its original purchase price.

1. Limits on deducting business losses

While the tax code does allow businesses to deduct losses from their taxable income, there are limits to how much can be deducted in a given year. For example, if your business is structured as a sole proprietorship or partnership, you may be limited in the amount of losses you can deduct based on your basis in the business. In addition, there are rules around when and how you can carry forward or back NOLs, so it's important to work with a tax professional to ensure you're taking advantage of all available deductions.

1. Changes to business loss rules

The tax code is subject to change, and there have been recent changes to the rules around deducting business losses. For example, the Tax Cuts and Jobs Act (TCJA) of 2017 limited the amount of NOLs that could be carried forward to offset taxable income in future years, and also eliminated the ability to carry back NOLs to prior tax years. In addition, the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 temporarily expanded the ability to carry back NOLs, which could provide some relief for businesses impacted by the pandemic.
In summary, tax relief for business losses can provide important financial support for companies that experience setbacks or challenges. However, it's important to understand the rules around deducting losses and to work with a tax professional to ensure you're maximizing your deductions and taking advantage of any available relief programs.