Taxes on Negative Operating Income

by Mallory Otis - Updated September 26, 2017
Operating income and taxable income are often different amounts.

Usually negative operating income is bad news for a business owner. This means that the business has spent more than it has earned. The bright side to negative operating income is that the business usually owes no income tax. However, there are circumstances where a business will still owe tax even if operating income is negative.

Operating Income

Operating income refers to the normal income a company earns minus its operating expenses. Operating income is the income earned on a company’s sales of goods and services. It does not include one-time events not related to normal operations, such as the sale of a piece of unused property. Operating expenses refer to the costs of operating the company in order to sell goods and services. Specifically, they do not include interest and income taxes.

Negative Operating Income

Negative operating income occurs when a company’s operating expenses exceed its income from goods and services. This is usually a bad indicator for a business, and it can be caused by many different things. It can occur during an economic recession, and typically other similar companies will experience a similar downturn. Also, the company could be poorly managed, leading to a bad economic outcome. Negative operating income can also be due to rising production costs on already small profit margins.

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Operating vs. Taxable Income

A company can still be taxed when it has negative operating income because operating income is different than taxable income. Taxable income includes almost all income, not just income from normal business operations. For example, taxable income also takes into account non-operating expenses like interest. Usually if a company has negative operating income, it will also have negative taxable income. However, there are situations where a company could have negative operating income and positive taxable income.

Example

Assume that Company A has earned $1 million from the sale of its product line. It has also paid $1,050,000 in operating expenses, $50,000 in interest expenses and $25,000 in taxes. Also during the year, Company A sold a piece of property that it was no longer using for $150,000. Company A’s operating income is actually an operating loss of $50,000 ($1 million in sales minus operating expenses of $1,050,000). Interest expenses and taxes do not factor in here because they are not related to operations. Likewise, the sale of the property isn’t included because it is likely a one-time event not related to the operating of the business. Taxable income for Company A is $25,000, meaning that Company A will have to pay taxes even though its operating income is negative. Taxable income includes the total income of $1,150,000 ($1 million in sales plus $150,000 from the sale of property) minus the total expenses of $1,125,000 ($1,050,000 in operating expenses, $50,000 in interest expenses and $25,000 in taxes).

About the Author

Mallory Otis began writing professionally in 2011. She is a certified public accountant (inactive) with a background in accounting for investments and not-for-profit accounting, as well as tax accounting for individuals, partnerships and C corporations. She graduated from Birmingham-Southern College in 2005 with a Bachelor of Science in accounting.

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