An overview of how the different types of business losses are treated in your tax return.
Net Operating Loss (NOL): The TCJA limited taking business loss. When the net business income from Schedule C/E is negative, a NOL is generated. It can offset income from other sources up to 80% of the Taxable Income. Any remaining NOL can be carried forward indefinitely.
Business Loss Limitation: The maximum business loss that can offset income from other sources is limited to $250K/$500K for Singles/MFJ (Married Filing Jointly). Any excess loss is carried forward as NOL.
Hobby Loss Rule: The IRS looks at several factors to decide if your business should be classified as a hobby. The Hobby Loss Rule is one such factor. A business not profitable for 3 out of the last 5 years could be deemed as hobby and therefore you may not be able to deduct the loss against other income.
Rental Passive Activity Loss: Rental income is considered passive except for real estate professionals who spend >250 hours a year in providing rental services. Rental income is offset by expenses such as mortgage interest, property tax, HOA fees, maintenance, etc. on Schedule E. Please refer to our blog “Income Tax Calculation Flow and Deductions” for a detailed view of where the different tax Schedules are applied in the 1040. Individuals with MAGI <$100K and who are not real estate professionals can only deduct a rental loss of up to $25K.
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