Loss Reported on Schedule C
Tax law distinguishes between ordinary losses and capital losses. An ordinary loss results when business expenses exceed business income. A capital loss reults when a capital asset (i.e. stocks and bonds) is sold for less than its original cost.
An ordinary loss is fully (100%) deductible against other items of income reported on Form 1040 (e.g., wages for yourself or a spouse, interest, dividends, etc.).
In contrast, for individuals, there is an annual deduction limit for a net capital loss (C corporatons have different rules). The maximum deduction is $3,000, which may be deducted from other sources of income reported on Form 1040.
If a net capital loss exceeds $3,000 in any given year, the excess amount must be carried over to the following year where it becomes part of the computation of capital gains and losses of that year.
The character of a capital loss (i.e. short-term or long-term) is retained in the carryover year. So, if the loss was a short-term loss in the loss year, it remains a short-term loss in the carryover year.
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- Return to the Business Deductions Table of Contents to find related links