You can reduce a business loss by using it to offset other income, carrying it forward or back to reduce taxes in other years, and claiming all eligible deductions and credits.
Can I deduct business losses?
Yes, you can deduct business losses from your other income for the year if you’re a sole proprietor, LLC owner, S corporation shareholder, or partner.
Say your business loses $25,000 but you pull in $60,000 from your day job. That loss knocks your taxable income down to $35,000 for the year. This only works for pass-through entities, though—C corporations handle losses at the corporate level. Keep every receipt and invoice handy; the IRS will want proof if they come knocking.
What happens when your business takes a loss?
When your business takes a loss, you can use that loss to reduce your taxable income from other sources, lowering your tax bill.
Imagine your business dips $15,000 into the red while you earn $50,000 from a W-2 job. Suddenly, your taxable income drops to $35,000. For partnerships, LLCs, and S corps, the loss flows through to your personal return based on your ownership share. If the loss is bigger than your other income, the leftover becomes a net operating loss (NOL) you can carry forward to future years.
Can I offset business losses against other income?
Yes, business losses from pass-through entities can offset other personal income such as wages, interest, or rental income.
Picture this: rental income sits at $12,000, but your business posts a $9,000 loss. You’ll only owe tax on the remaining $3,000. Starting in 2026, though, if your business loss tops $270,000 (single) or $540,000 (married filing jointly), the extra doesn’t offset income right away—it becomes an NOL carryforward instead. The IRS spells out the rules year by year.
Can business losses be carried forward?
Yes, business losses can be carried forward indefinitely and used to offset up to 80% of taxable income in future years.
Let’s say your business racks up a $50,000 net operating loss in 2026. In 2027 you bring in $60,000. You can wipe out $48,000 of that income, leaving just $12,000 to tax. Any unused loss keeps rolling forward. This rule has been in place since the 2017 Tax Cuts and Jobs Act and stays in effect through 2026. For the latest limits and examples, flip to IRS Publication 536.
How many years can you file a loss of your business?
You can claim a business net loss for up to two years within a five-year period without the IRS treating your business as a hobby.
Cross the two-loss threshold in five years and the IRS starts eyeing your activity as a hobby instead of a business. That means they can disallow your deductions. To stay on the right side of the rules, keep a business plan, advertise your services, track every expense, and show real efforts to turn a profit.
Do you have to pay taxes if your business loses money?
If your net business income is zero or negative, you generally don’t owe income tax on business profits.
That said, you may still need to file a return if you’ve got employees, gross receipts over $400, or certain credits or deductions in play. Even when no tax is due, filing keeps your records clean and can shield you from future IRS questions. Check the IRS filing requirements for small businesses to see the 2026 thresholds.
Can small business losses offset personal income?
Business losses that pass through to owners can offset personal income, but large excess losses are suspended and treated as NOL carryforwards.
Take a partnership where your share of the loss hits $400,000 and your wages are $150,000. In 2026, only $150,000 of that loss can offset your wages. The remaining $250,000 becomes an NOL carryforward. The annual cap for excess business losses is $270,000 for single filers and $540,000 for joint filers, adjusted for inflation. IRS Publication 536 walks through how to apply these limits.
Is a business loss considered income?
A business loss is not income; it’s a reduction of your income or an asset that you carry forward to reduce future taxes.
When you fill out Schedule C and expenses exceed revenue, the negative number lowers your total taxable income. C corporations report losses at the company level and carry them forward or back. Always report losses correctly—getting it wrong can trigger underpayment penalties.
How do I claim a business loss on my taxes?
To claim a business loss, report income and expenses on IRS Schedule C (Form 1040) and deduct the loss on your personal return.
Start with gross income, then subtract allowable expenses like rent, utilities, payroll, and supplies. If expenses exceed income, the shortfall flows to Form 1040, Schedule 1, line 8, trimming your adjusted gross income. Hold onto receipts, mileage logs, and bank statements for at least three years. LLCs, partnerships, and S corps report the loss on Schedule K-1 instead.
Can an LLC carry forward losses?
Yes, an LLC can carry forward losses whether taxed as a partnership, S corporation, or sole proprietorship.
In multi-member LLCs taxed as partnerships, each owner’s share of the loss follows the same rules as partnerships. The $250,000/$500,000 excess business loss limit applies per owner. Any unused loss keeps rolling forward forever and can offset future income. Make sure you allocate losses according to the operating agreement and report them on Schedule K-1.
How many years can you carry back losses?
As of 2026, most business losses can only be carried forward, not back, except for certain farming and disaster-related losses.
The 2017 Tax Cuts and Jobs Act did away with most loss carrybacks after 2017. Farming businesses and those in federally declared disaster zones can still carry back losses for five years. For the latest carryback rules and exceptions, see IRS Publication 536.
Is it good to show a loss in business?
It’s only good to show a loss if your business is profitable in at least three of the last five years, otherwise the IRS may treat it as a hobby.
Hit three or more loss years in five and the IRS presumes it’s a hobby, shifting the burden to you to prove you’re running a real business. To stay safe, aim for profit in at least three of the last five years and keep records of marketing, customer growth, and product improvements.
Does a business loss trigger an audit?
Claiming consistent business losses year after year increases the chance of an IRS audit, especially if the business never turns a profit.
The IRS’s software flags returns with repeated losses and low income. To lower your audit odds, keep meticulous records, show active management, and document your efforts to become profitable. If the IRS does audit, be ready with bank statements, invoices, and a solid business plan.
What happens if my LLC does not make money?
If your LLC has no income and no expenses for the year, you generally don’t need to file a tax return.
If the LLC has expenses that generate credits or deductions, you may still need to file to claim them. LLCs with employees must file employment tax returns no matter the income. Don’t forget state rules—some states charge annual fees or require reports even for inactive LLCs.
What happens if your business doesn’t make money?
If your business doesn’t make money, you may still owe payroll taxes if you have employees and must withhold federal income and FICA taxes from wages.
Even with zero profit, businesses with employees must deposit federal payroll taxes monthly or semiweekly. State unemployment taxes and workers’ compensation premiums can also apply. Keep payroll records straight and file Forms 941 quarterly and Form 940 annually. When in doubt, a tax pro can help you stay compliant in your state.
