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Offsetting Income with Business Losses - Sole Proprietors

Sole Proprietors and Single-Member LLC's


How Business Losses Can be Used to Offset Income

You have a loss in your business for the year. Can you use that loss to decrease your taxable income? It depends on the type of legal entity of your business and whether your investment in the business is "at risk" in whole or in part. In this section, we will look at how losses are determined for different legal entities and how they affect taxes for the business owners.

Sole Proprietorship
A sole proprietorship is taxed through the business owner's personal tax return (Form 1040 and its variants). The business owner fills out Schedule C by showing the income and deductible expenses of the business. At the end of this form, on Line 31, the net profit or loss of the business is shown. If there is a profit, this number is transferred to Line 12 of Form 1040. If there is a loss, you must determine if all of your investment in the business is "at risk." The investments of most business owners are at risk; investments that are not at risk include "stop loss" or "non-recourse" loans. (See the instructions for Form 6198 for more information, or check with your CPA or tax advisor. This is one section you don't want to try by yourself, unless you are positive you know what you're doing.)

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