Do You Pay Taxes If Your Business Loses Money?

Losing money in your business can be a stressful and confusing experience, especially when it comes to taxes. You might wonder if you still have to pay taxes on your business's losses.

The good news is that the tax code allows you to offset your business income with losses, reducing your overall tax liability. This is known as a net operating loss (NOL).

You can carry forward NOLs from previous years to reduce your tax bill in future years, providing some relief from the financial burden of a losing business. This can be a huge help in times of financial struggle.

You might think that if your business loses money, you're off the hook when it comes to taxes. But unfortunately, that's not the case. As a startup, you'll still have to file annual tax returns at the Federal and state levels.

Income Tax is the type of tax most people think of when they hear taxes. It's based on your Net Income, or profit. But, you'll still have to file annual tax returns, even if you're losing money.

Some cities, like San Francisco, will tax your Gross Revenue, which is a different type of tax altogether. This is known as a Gross Receipts Tax.

You'll also have to pay a Franchise Tax, which is a tax imposed on businesses that exist, regardless of whether they've generated income. This can be a minimum fee, and it's not related to your company's financial performance.

If you have employees, you'll need to pay Payroll Tax, which can be a complex and time-consuming process. But, if you file for an R&D Tax Credit, you can get up to $250K in refunds!

Here's a list of taxes that startups might pay, even if they lose money:

It's worth noting that a CPA or firm that filed your annual tax return will not have taken care of all these types of taxes. It's ultimately the CEO's responsibility to ensure that these taxes are addressed and paid on time.

A net operating loss, or NOL, occurs when a business's total deductions exceed its total income during the tax year. This can be a powerful tool to improve your long-term business finances.

To determine if you have an NOL, you start with your adjusted gross income (AGI) on your tax return for the year reduced by your itemized deductions or standard deduction. This must be a negative number or you won't have an NOL for the year.

The Tax Cuts and Jobs Act (TCJA) has eliminated carrybacks for NOLs, meaning you can only deduct an NOL against the current year's taxes. However, a two-year carryback continues to apply for certain losses incurred by farming businesses.

You can deduct up to 80% of taxable income for the year with an NOL, but any unused NOL amounts may be carried forward and deducted in any number of future years.

For sole proprietorships, partnerships, and S corporations, losses pass through to personal tax returns, potentially reducing your personal income tax too.

Here's a breakdown of how different business structures handle losses:

A business loss occurs when expenses and charges exceed revenues received by a company. This may be due to any number of factors, including economic fluctuations, unsuccessful investments or unforeseen expenses.

To make a business loss tax-deductible, certain conditions must be met, including commercial activity, proof of loss, and reporting within a specified period after the end of the fiscal year.

Having an NOL can be a significant tax benefit, but it's essential to understand the rules surrounding this potential tax break.

If your business has a loss for the year, you'll still need to file your taxes.

Business owners often face a year in the red, but that doesn't mean you're exempt from filing taxes.

You can file your taxes even if your business has a loss, and it's actually a good idea to do so to take advantage of any deductions you might be eligible for.

Reaching out to a tax expert can help you navigate the process and ensure you're taking advantage of all the deductions available to you.

A net operating loss (NOL) occurs when a business's total deductions exceed its total income during the tax year.

The way to determine if you have an NOL is to start with your adjusted gross income (AGI) on your tax return for the year, reduced by your itemized deductions or standard deduction (but not your personal exemption). This must be a negative number for you to have an NOL for the year.

You can carry a loss back to past tax years, but this option is no longer available for most businesses. However, farming businesses can still carry back losses for two years.

The Tax Cuts and Jobs Act (TCJA) eliminated carrybacks for NOLs, starting in 2018. Now, an NOL can only be deducted against the current year's taxes. However, some businesses may still be able to carry back losses for certain years.

If you have an NOL, you can use it to offset up to 80% of your taxable income in future years. Any unused NOL amounts can be carried forward and deducted in any number of future years.

Here's a breakdown of the NOL rules:

The TCJA also limits deductions of "excess business losses" by individual business owners. Married taxpayers filing jointly may deduct no more than $500,000 per year in total business losses, while individual taxpayers may deduct no more than $250,000.