How to File For Sole Proprietorship With Losses

By Jeff Clements

A sole proprietorship is a form of business which operates as the alter ego of the owner and is not a separate legal entity or a separate taxpayer. As such, the earnings or losses arising from the business activities of the sole proprietorship are attributed directly to the owner himself.

A sole proprietorship is a form of business which operates as the alter ego of the owner and is not a separate legal entity or a separate taxpayer. As such, the earnings or losses arising from the business activities of the sole proprietorship are attributed directly to the owner himself.

Schedule C

A sole proprietorship reports business income and related business expenses on Schedule C of his personal income tax return. This includes gross sales, net returns and standard business expenses, such as rent, cost of goods sold, wages, supplies, utilities, depreciation, interest and advertising.

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Operating Loss

As with any business, a sole proprietorship's expenses may exceed its gross revenues, resulting in an operating loss. Although this is generally an undesirable outcome for the sole proprietor, the tax code provides the taxpayer with some form of relief.

Tax Shelter

A net operating loss from Schedule C can be applied against the sole proprietor taxpayer's other sources of income, creating a form of a tax shelter. This can be advantageous as it can reduce the overall taxable income of the sole proprietor and his total tax bill accordingly.

Filing Requirements

Unlike other forms of business, such as a corporation or partnership, once the sole proprietor timely files his complete and accurate individual tax return with Schedule C attached, whether it shows an income or loss, he has satisfied his income tax filing obligations with the IRS.

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Depreciation in a Sole Proprietorship

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S-Corporation Tax Write Offs for Losses

An S corporation is a small corporation that meets certain criteria and has made an election with the IRS to be treated as a disregarded entity for tax purposes. Instead of paying taxes at the corporate level, the S corp's losses and profits are passed through to shareholders, who pay the taxes. This has various tax advantages for owners, whether the company has a profitable tax year or shows a loss on its corporate tax return.

Net Operating Loss for a Sole Proprietorship

It isn’t uncommon for sole proprietors to report losses in some years, which are the result of incurring business expenses that exceed total revenue. You may be able to use these losses to offset some of the other income reported on your tax return. However, if after combining your sole proprietorship losses with your other income the result is still a loss, you may have a net operating loss, or NOL, that you can deduct from the taxable income you report in different tax years.

How do I File Taxes for an LLC?

A limited liability company, or LLC, is formed under state law but is not recognized as a business classification by the IRS. An LLC must choose how it will be taxed by electing treatment as a sole proprietorship or a corporation, if it is a single-member LLC, or as a partnership or a corporation, if it is a multi-member LLC. An LLC electing treatment as a corporation can make an additional election to be taxed as an S corporation. The way an LLC files taxes depends upon the tax elections it has made.

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