9.
Figuring Net Profit or
Loss
After figuring your business
income
and expenses, you are ready
to figure the net profit or net
loss from your business. You do
this by subtracting business
expenses from business income.
If your expenses are less than
your income, the difference is
net profit and becomes part of
your income on page 1 of Form
1040. If your expenses are more
than your income, the difference
is a net loss. You usually can
deduct it from gross income on
page 1 of Form 1040. But in some
situations your loss is limited.
This chapter briefly explains
two of those situations. Other
situations that may limit your
loss are explained in the
instructions for line G and line
32 of Schedule C.
If you have more than one
business, you must figure your
net profit or loss for each
business on a separate Schedule
C.
Net Operating Losses
(NOLs)
If your deductions for the
year are more than your income
for the year (line 40 of your
Form 1040 is a negative number),
you may have a net operating
loss (NOL). You can use an NOL
by deducting it from your income
in another year or years.
Examples of typical losses
that may produce an NOL include,
but are not limited to, losses
incurred from the following.
- Your trade or
business.
- Your work as an
employee (unreimbursed
employee business
expenses).
- A casualty or theft.
- Moving expenses.
- Rental property.
A loss from operating a
business is the most common
reason for an NOL.
For details about NOLs, see
Publication 536, Net Operating
Losses (NOLs) for Individuals,
Estates, and Trusts. It explains
how to figure an NOL, when to
use it, how to claim an NOL
deduction, and how to figure an
NOL carryover.
Not-for-Profit
Activities
If you do not carry on your
business to make a profit, there
is a limit on the deductions you
can take. You cannot use a loss
from the activity to offset
other income. Activities you do
as a hobby, or mainly for sport
or recreation, come under this
limit.
For details about
not-for-profit activities, see
chapter 1 in Publication 535,
Business Expenses. That chapter
explains how to determine
whether your activity is carried
on to make a profit and how to
figure the amount of loss you
can deduct.
