Owning and running a business comes with unlimited potential for growth and lofty dreams. It also comes with the risk of failure and defeat. Losses are just as much a part of life as success, and luckily the law give us the opportunity to leverage some of those losses towards potentially paying less taxes.
Net Operating Losses (NOL)
Let’s say that you are preparing your small business taxes on your Schedule C. You notice that your deductions are more than your income. Your business may have a net operating loss (NOL). Don’t fret. NOL can be used as a deduction for your individual taxes to reduce your taxable income and ultimately lower what you owe in taxes. However, there are some limits. Spending money on a bad date unfortunately won’t count as NOL.
For the most part, NOL comes from running a business. Expenses associated with starting and maintaining a business often qualify for business deductions. Sometimes your profits won’t match what you’ve spent to keep the business going and you’ll have a qualifying NOL. Only in narrowly defined circumstances, such as qualified casualty losses, can personal losses qualify. There are also limits to NOL for individuals, such as the NOL cannot exceed 80% of the individual’s taxable income. Capital losses, such as stocks losing value, cannot exceed capital gains.
Carry on, my wayward NOL
Once you’ve correctly calculated your NOL, you can use it as a deduction for your taxes. Of course, there are rules to it though. The Tax Cuts and Jobs act made it so NOL after 2018 cannot be “carried back” to previous tax years, with some specific exceptions in industries like farming. If your NOL hits the “80% of your taxable income” limit, the excess NOL will be carried over to the next tax year and onward until that NOL is depleted.
By using NOL effectively, you can mitigate the costs associated with starting up a business. Learning the ins and outs of NOL while starting up that business may be too time consuming and costly. Having a back-room team manage those details can help your start-up get on the right foot. Our firm, MiklosCPA, has supported many small business clients with their tax and accounting concerns so they can focus on their ambitions to grow their business. Get in touch with us to learn more about how we can help your business, and follow us on our social media pages for future “good-to-know” articles and other interesting tax tips.