What Can Be Considered a Business Loss?
A business loss will generally arise from one of two things: inefficiencies in normal operations or an abnormal event that sends the disrupts business. Business losses occur when a company does not make enough money to cover its operating expenses. For a business owner – especially those of small businesses – having business losses can be detrimental and should be avoided at all times.
If a company had more operating expenses in a given period – usually a month or fiscal quarter – than it did revenue, it is said to be operating at a loss. Operating expenses can include things such as payroll, employee benefits and pension contributions, sales commissions, advertising, employee transportation and travel, business repairs, rent and asset depreciation. Operating expenses are generally grouped into one of three types of losses for accounting purposes: administrative, general expenses or selling expenses.
When a company experiences an unusual and irregular economic event, it is usually not categorized as an expense, but rather as a loss. Typically, these events are onetime occurrences.
An irregular business loss can come from unusual events or effects of accounting changes. A casualty business loss can be triggered by events such as hurricanes, floods, earthquakes and other natural disasters that cause the loss of equipment and property.
These types of losses in accounting terms can also be triggered by theft, damage to products and the losses associated with events such as an increase in rent.
If a company suffers from casualty losses during the year, it may be able to deduct some of the unreimbursed losses on its taxes. For example, if a company suffers from $50,000 in casualty losses but insurance only covers $40,000, the company may deduct the remaining $10,000.
The profit and loss (P&L) statement, or income statement, is a company's financial statement that summarizes its revenues, expenses and costs incurred during a particular time period.
The P&L statement is the most common financial statement, and it promptly shows how much profit or loss a business generates. Unlike a balance sheet, the P&L statement shows changes in a company's revenue, expenses and costs over time.
Unusual gains and losses are reported separately from a company's regular income and operational expenses. Separating these usual gains and losses gives a more accurate picture of the company's financial standing because they are not skewed by isolated occurrences.
If a company experiences a significant enough loss, it may be eligible for a large tax deduction. A net operating loss occurs when a company has more allowable tax deductions than it does taxable income.
For example, if a company has a substantial property loss that results in a $200,000 deduction, but it only has $150,000 in taxable income, the company has a net operating loss. Because the company does not have any taxable income, it will not pay taxes for that year.
Business losses affect business owners and their taxes differently depending on the business type. When it comes to corporations, the owners are not taxed directly on their company's profits and losses because the corporation has separate taxes from its owners. Because the owners are considered shareholders, they will only be taxed on the dividends paid out. If the company does not pay out dividends, there is nothing to tax.
For other types of businesses, the company's profits and losses are passed through to the owners and reported on their personal tax returns. These can include sole proprietors, partnerships and S corporations. A person would also report LLC losses on personal taxes.