After figuring your business income and expenses, you are ready to figure the net profit or net loss from your business. You do this by subtracting business expenses from business income. If your expenses are less than your income, the difference is net profit and becomes part of your income on page 1 of Form 1040. If your expenses are more than your income, the difference is a net loss. You usually can deduct it from gross income on page 1 of Form 1040. But in some situations your loss is limited. This chapter briefly explains two of those situations. Other situations that may limit your loss are explained in the Instructions for Schedule C, line G and line 32.
If your deductions for the year are more than your income for the year (line 41 of your Form 1040 is a negative number), you may have a net operating loss (NOL). You can use an NOL by deducting it from your income in another year or years.
Examples of typical losses that may produce an NOL include, but are not limited to, losses incurred from the following.
Your trade or business.
Your work as an employee (unreimbursed employee business expenses).
A casualty or theft.
A loss from operating a business is the most common reason for an NOL.
For details about NOLs, see Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts. It explains how to figure an NOL, when to use it, how to claim an NOL deduction, and how to figure an NOL carryover.
If you do not carry on your business to make a profit, there is a limit on the deductions you can take. You cannot use a loss from the activity to offset other income. Activities you do as a hobby, or mainly for sport or recreation, come under this limit.
For details about not-for-profit activities, see chapter 1 in Publication 535, Business Expenses. That chapter explains how to determine whether your activity is carried on to make a profit and how to figure the amount of loss you can deduct.
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