Taxes And Business Losses

What is a business loss?

When a business entity doesn’t make enough money to cover its operating expenses, this is referred to as a business loss. It happens for two reasons: operational inefficiencies or an abnormal event that disrupts business.

Passive activity loss limits

Passive activity losses are deductible up to the amount of your passive activity income. They include losses from trade or business activities you don’t materially participate in.

Rental real estate activities are always considered passive. This is true unless you materially participate as a real estate professional. An activity is a rental activity if the income generated:

• Is mainly from the use of property
• Isn’t mainly from the performance of services

Passive loss deduction limit

Generally, taxpayers can only deduct passive activity losses from passive activity income.

Special loss allowances

You might have passive-activity losses from rental real-estate activities in which you actively participate. If so, you’re allowed a special allowance based on your filing status:

• Single or married filing jointly — $25,000
• Married filing separately and lived apart all year — $12,500

You can deduct up to $25,000 in passive losses against your ordinary income (such as W-2 wages) if your modified adjusted gross income (MAGI) is $100,000 or less. If you are married filing separately, the special allowance is limited to $12,500 and the phaseout begins at MAGI of $50,000.

These special allowances:

• Will be reduced by 50% of the amount of your modified adjusted gross income (MAGI) that’s more than $100,000 — or $50,000 if married filing separately
• Can’t be used if your income is $150,000 or more — or $75,000 if married filing separately. This is true unless you have an exception claiming low-income housing credits.
• If you lived together at any time during the year and file married filing separately, you also can’t claim losses.

You actively participate in rental real-estate activities if both are true:

• You have a 10% or greater ownership interest throughout the year.
• You make management decisions, like:
  • Approving new tenants
  • Deciding on rental terms
  • Approving expenditures

You can deduct the lower of these from your non-passive income:

• $25,000 — or a reduced amount
• Net loss from active-participation rental real-estate activities

Losses are offset against passive income before figuring the amount allowed under this provision.

Do You Own a Business with a Business Loss?

Owning a business poses special considerations come tax time, including special filing requirements. Whether you make an appointment with one of our knowledgeable tax pros or choose one of our online tax filing products, you can count on H&R Block to help you get back the most money possible.