Will I Get a Tax Refund if My Business Loses Money?

Deciding to be self-employed can be an exciting venture, but it involves a lot of forethought. There are some important differences between working for an employer and being self-employed. One of the biggest differences is how a person files taxes at the end of the year. This leaves many wondering if there will be a refund issued if the company takes some time to get its feet off the ground and operates at a loss. Important factors come into play when filing taxes while self-employed that can determine if the loss of a company will merit a refund.

Types of Business Ownership

There are four common types of businesses that a person chooses to operate under, but income from three of those types of businesses can be included in a personal tax return. A sole proprietorship, a limited liability company (LLC), and an S corporation may do so. A majority of small business owners elect to operate as a sole proprietorship or LLC.

Determining Net Operating Loss

If the operating expenses outweigh a business’s profits, then steps need to be taken to determine the net operating loss (NOL). It is important to be familiar with every type of qualified deduction a business can claim and keep detailed records of them, and this is because the total number that is calculated in the end will be subtracted from the total annual income. This income may include a spouse’s income, investment income, etc. The resulting number is called the adjusted gross income (AGI).

Once the AGI is determined, subtract either itemized deductions or standard deductions. If the number is negative, an additional step can be made to determine the NOL. The final step is to take the number determined by subtracting nonbusiness income from nonbusiness deductions and adding that number back to the current total. If the result is still a negative number, it reflects an NOL, and a tax refund may be issued.