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Can I deduct my business losses from my taxable income?

New York, NY |

I have two sources of income:
1. As an employee of a company, I receive a $75,000 annual salary.
2. As an individual proprietor, I receive about $25,000 per year in profits, but this fluctuates.

Last year, I had a loss of $10,000 in my sole proprietorship. Can I deduct this from my $75,000 salary when determining my 2013 federal taxable income?

Attorney Answers 3

Posted

There are two issues to be addressed to answer your question.

First, is your proprietorship an activity in which you engage primarily for profit? This is a subjective determination, but the IRS measures it with a 9 factor "objective" test, which is found in Treasury Regulation 1.183-2(b).

If the answer to the first question is that your primary motive is to make a profit, then you need to look at the passive activity loss rules of Internal Revenue Code Section 469 to determine if your proprietorship is an "active" activity. There are seven tests in the Treasury Regulations under 1.469 to determine if you are an "active" participant. The most common one is the "500 hour test". If you (and your spouse - spousal time counts) spend more than 500 hours per year in this activity, you are probably active. There are other tests if you do not have 500 hours.

There are some tricky exceptions and exceptions to the exceptions, particularly if the proprietorship involves real estate and/or rentals. You can only offset active income (which your salary probably is) with losses from an ACTIVE activity.

You should check with a tax professional. There are not enough facts in your question to determine if you can offset or not. These two sets of rules are complex - especially the Section 469 "Passive Activity" rules.. But they can be beneficial if you can meet the tests.

This post is for general discussion purposes only and may not be relied upon. No attorney-client relationship is created by this answer. Federal law requires that you be advised that to the extent that this message or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penaties that may be imposed by law.

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Bertram Paul Husband

Bertram Paul Husband

Posted

You can find a knowledgeable CPA and tax attorney who is familiar with these issues in New York in Bruce Oberfest, Esq. CPA. You can contact him at: Bruce Oberfest & Associates 287 King St Chappaqua, NY 10514 (914) 238-3800

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Posted

Suppose either: (i) My proprietorship is not an activity in which I engage primarily for profit; or (ii) My proprietorship is an activity in which I engage primarily for profit but my proprietorship is a “passive” rather than “active” activity. In either of these cases, do I need to pay taxes on my gains in the years in which I make a profit? In years in which I have a loss, am I never able to deduct the losses from my active income (salary)?

Posted

If Schedule C shows a loss that loss is entered on 1040 (2013) LIne 12 as a loss and is deducted from your other income in determining your Gross income.

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Posted

It will net out and reduce your total gross income (yes.)

This answer is based on general legal principles only and is not intended to provide specific legal advice. This answer is for informational purposes only and does not constitute the formation of a lawyer-client relationship. Any reader of this answer should not make decisions based upon in without first directly consulting with an attorney

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