Whatever the reasons for it, a business loss or net operating loss is nothing to celebrate. Nobody likes losing money, especially if you’ve been working hard to build a successful business. Luckily, you can usually claim the lost money on your tax return.Here’s how to go about this.
What is a business loss or net operating loss?
In the UK, a business loss or net operating loss is known as a trading loss. It happens when your business expenses for an accounting period are greater than your income. This applies whether you do business as a sole trader, as a partnership or as a limited liability company.
Example:
Let’s say your accounting period runs from the 6 April to the 5 April.In 2017 / 18, you earned £20,000 but you spent £25,000.This means you’ve made a business loss — or trading loss — of £5,000 in the accounting period ending 6 April 2018.
I’ve made a business loss. Now what?
How you claim a business loss on your taxes depends on whether you’re a sole trader, in a partnership or a limited liability company.
How do I claim lost money on my tax return as a sole trader or partnership?
If you do business as a sole trader or as a partnership, you can deduct your business loss from your taxes in one of the following ways:
- Find out your total taxable income by totting up everything you earned in the current tax year, including any salary or non-business income such as savings or investments. Set this off against the loss.
- Deduct the loss from last year’s tax bill. If you make a loss in your fourth year in business, you can set it off against your income for all three previous tax years. Similarly, if you decide to stop trading and make a loss in your last year, you can set it off against your profits for the previous three years.
- Deduct the loss from your total income in a future tax year.
- Starting in 2013, tax relief for sole traders and partnerships is capped. You can only claim up to £50,000 or 25 percent of your income as a trading loss, whichever is greater. So, if you make a trading loss of £51,000, you can only claim £50,000.