How to File For Sole Proprietorship With Losses

by Jeff Clements
Sole proprietors file their business income or loss as part of their individual tax return.

Sole proprietors file their business income or loss as part of their individual tax return.

Comstock Images/Comstock/Getty Images

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.

File an LLC application

Fit your business needs with the right LLC package

http://www.legalzoom.com/limited-liability-company

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.

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.