Can You Write Off Business Losses on Your Personal Taxes? Rules, Limits, and How to Do It

Quick answer

Yes, you can often write off
business losses
on your personal tax return when you operate through a pass-through entity like a sole proprietorship, single-member LLC, partnership, or S corporation, subject to basis, at-risk, passive activity, and excess business loss limits [1] . If your business is a C corporation, losses generally stay at the corporate level and do not flow to your personal return [1] .

How loss write-offs work by business type

Sole proprietorship or single-member LLC

If you operate as a sole proprietor or a single-member LLC treated as a disregarded entity, you report income and expenses on Schedule C with your Form 1040. A Schedule C loss can offset other personal income, subject to the tax law limits discussed below [1] . Example: You earn $80,000 in W-2 wages and have a $20,000 Schedule C loss. If you materially participate and have sufficient basis and at-risk amount, that $20,000 may reduce your taxable income from $80,000 to $60,000, before other adjustments [1] .

Partnership or multi-member LLC

Partnerships and multi-member LLCs file Form 1065 and issue Schedule K-1s. Your share of loss may pass through to your personal return if you have sufficient basis and meet at-risk and passive activity requirements. The loss is then reported on your Form 1040 and related schedules, where it may offset other income within the limits [1] .

S corporation

An S corporation files Form 1120-S and issues Schedule K-1s to shareholders. Shareholder losses may pass through if you have sufficient stock and debt basis, and you meet the at-risk and passive activity rules. Qualified losses can offset other income on your personal return, subject to the excess business loss cap and other limitations [1] .

C corporation

C corporations are separate taxpaying entities that file Form 1120. Corporate losses (net operating losses at the corporate level) do not pass through to owners’ personal returns. You generally cannot deduct a C-corp’s loss on your personal Form 1040 [1] .

Key limits that can reduce or defer your loss deduction

1) Basis and at-risk limits

Even if a loss passes through, you can only deduct it up to your basis in the entity and the amount you are economically at risk. Basis typically includes your contributions and certain loans you are personally liable for. If your deductible loss exceeds basis or at-risk amounts, the excess is suspended and carried forward until basis or at-risk amounts increase. Many tax professionals recommend tracking stock basis, debt basis, and at-risk amounts annually for S corps and partnerships to avoid surprises at filing time [1] .

2) Passive activity loss (PAL) rules

Losses from activities in which you do not materially participate are generally passive and can only offset passive income. Rental real estate is usually passive unless you qualify as a real estate professional. H&R Block explains that passive losses are deductible only up to passive income, with limited exceptions for certain rental real estate situations [2] . If you materially participate (for example, you meet one of the IRS material participation tests), your trade or business losses may be nonpassive and able to offset other income, subject to the remaining limits [2] .

Source: luzenelhorizonteymas.blogspot.com

3) Excess business loss (EBL) cap

There is a statutory cap on the amount of aggregate business losses that can offset nonbusiness income in a tax year. These are referred to as excess business loss limits. Guidance for small-business owners commonly references per-filer caps that restrict how much of a pass-through loss can reduce other income, with any excess converting to a net operating loss (NOL) carryforward under current law [3] . If your current-year business losses exceed the limit, the extra amount is not lost; it may carry forward to future years under NOL rules, subject to further limitations [3] .

Step-by-step: How to claim business losses on your personal return

Step 1: Confirm your entity type and filing forms

– Sole proprietor or single-member LLC: Use Schedule C with Form 1040. Losses flow directly to your personal return and can offset other income within the limits [1] . – Partnership or multi-member LLC: The entity files Form 1065 and issues you a Schedule K-1. You report your share of losses on your Form 1040, subject to basis, at-risk, and PAL limits [1] . – S corporation: The entity files Form 1120-S and issues Schedule K-1s. Your loss deduction depends on basis, at-risk, and PAL rules [1] . – C corporation: Losses remain at the corporate level; you cannot deduct them personally [1] .

Step 2: Establish basis and at-risk amounts

Gather records of capital contributions, distributions, and loans to the entity. For S corporations, separately track stock basis and any shareholder loans. For partnerships/LLCs, include your share of liabilities to the extent they are recourse or otherwise increase at-risk amount under applicable rules. If your basis is insufficient to absorb the current-year loss, the excess is suspended and carried forward [1] .

Step 3: Determine material participation and PAL status

Assess how many hours you participated and whether your involvement was regular, continuous, and substantial. If you do not materially participate, your loss is generally passive and can only offset passive income, with rental real estate typically passive unless you meet real estate professional tests. Keep logs to substantiate participation in case of inquiry [2] .

Step 4: Apply the excess business loss limit

Aggregate total qualified business income and losses from all trades or businesses. If your net business loss exceeds the annual cap, the excess typically becomes an NOL carryforward under current law. Plan cash flow accordingly and consider timing of income and deductions to manage the cap’s impact [3] .

Step 5: File accurately with supporting schedules

Attach Schedule C (if applicable), Schedule E (for pass-through K-1 reporting), Schedule SE (if relevant), and any basis/at-risk disclosures required. Keep K-1s, basis worksheets, and participation logs with your records. When claiming depreciation or Section 179 on business assets, ensure Form 4562 is properly completed; this can affect current-year losses and future carryforwards [4] .

Real-world examples

Example 1: Single-member LLC loss offsets wages

Alex operates a consulting LLC and materially participates. The LLC shows a $15,000 loss after depreciation. Alex also has $70,000 in W-2 wages. With sufficient basis and at-risk amount, the $15,000 loss may offset the wages, reducing taxable income to $55,000 before other items, assuming no EBL limitation is triggered [1] .

Example 2: Partnership loss limited by passive rules

Jordan owns 20% of a restaurant partnership but does not materially participate. The K-1 reports a $10,000 loss. Because the activity is passive to Jordan, the loss can generally offset only passive income, not wages or interest. If Jordan lacks passive income this year, the $10,000 is suspended and carried forward to offset future passive income or gain on disposition [2] .

Example 3: S-corp shareholder basis limit

Taylor owns 100% of an S-corp that produced a $60,000 loss. Taylor’s stock basis is $40,000 and there are no qualifying shareholder loans. Taylor can typically deduct only $40,000 this year; the remaining $20,000 is suspended until basis increases (for example, via future income or additional contributions) [1] .

Common pitfalls and how to avoid them

Assuming all losses offset wages

Losses from activities without material participation are generally passive, so they cannot offset wages or interest income. Maintain time logs and contemporaneous records to support material participation if applicable [2] .

Ignoring the excess business loss cap

High-income filers with substantial pass-through losses may hit the annual EBL cap. Project results before year-end to consider timing income, accelerating or deferring expenses, and coordinating entity distributions or capital contributions to manage limits. Excess amounts often become NOL carryforwards under current rules [3] .

Not tracking basis

Without adequate basis, losses are suspended even if you materially participate. Maintain annual basis schedules for partnerships and S corps, and document any loans that may create or adjust basis under the applicable rules [1] .

Overlooking depreciation and elections

Depreciation and Section 179 elections can significantly increase current-year losses. Ensure Form 4562 is prepared correctly, and consider long-term implications like future deductions and potential recapture on disposition [4] .

Action plan: What to do next

1) Identify your entity type and confirm the correct tax forms for this filing season. If you’re unsure, review your prior-year filing pattern or consult a qualified tax professional. 2) Compile documentation: general ledger, receipts, depreciation schedules, K-1s, and records of capital contributions, distributions, and loans. 3) Evaluate material participation: summarize hours spent and responsibilities performed to support nonpassive treatment where applicable. 4) Calculate preliminary results mid-year and again before year-end to anticipate the EBL cap’s impact and plan cash flow. 5) Consider whether to adjust timing of large purchases or elections (for example, Section 179) in light of basis, at-risk, and EBL constraints. 6) If you operate a C corporation and want losses to potentially offset personal income, discuss with an advisor whether a different structure could be appropriate for future years. Any change has legal and tax consequences and should be evaluated carefully.

Alternative pathways to benefit from losses

– Grouping elections for activities: In some circumstances, taxpayers may make grouping elections that can affect material participation analysis and passive/nonpassive characterization. This is nuanced and may be beneficial when you participate in multiple related activities. A knowledgeable tax advisor can help you evaluate this. – Increase basis or at-risk amounts: Owners sometimes contribute additional capital or formalize loans to increase basis or at-risk amounts, allowing more current-year loss deduction. Documentation must be proper and consistent with tax rules. – Plan for suspended losses: Track suspended passive and basis-limited losses annually. They may be freed when you generate passive income, increase basis, or dispose of the activity in a fully taxable transaction, subject to applicable rules.

When to get professional help

Loss rules intertwine with basis tracking, PAL limits, the EBL cap, and depreciation. A credentialed preparer or CPA can help you apply the tests correctly, prepare Form 4562 when needed for depreciation-related losses, and ensure proper K-1 reporting. Many taxpayers find value in a mid-year checkup to make adjustments before year-end. If you prefer to self-educate first, reputable tax preparation resources provide overviews of entity-specific loss treatment and passive activity principles that can guide your discussion with an advisor [1] [2] [4] .

References

[1] H&R Block (2021). Can I report my LLC losses on my personal return? [2] H&R Block (2023). Taxes and business losses (passive activity rules overview). [3] United Capital Source (2024). Deducting LLC losses on your taxes: The essential guide (excess business losses, carryforwards). [4] Insureon (2025). Small business tax deductions and Form 4562 context.