Will I Get a Tax Refund If My Business Loses Money?

When your business spends more than it earns, the resulting financial loss does not automatically trigger a tax refund. However, this loss can create a tax benefit by lowering your overall taxable income for the year. This benefit, known as a Net Operating Loss (NOL), can reduce your tax liability and, in some circumstances, contribute to receiving a refund. The possibility of a refund depends on your business’s legal structure and whether you have other sources of income that the business loss can offset.

The way a business loss is treated for tax purposes is not the same for all business types. Understanding this distinction is the first step in determining how a loss will affect your personal tax situation and whether it could lead to a refund from taxes you have already paid.

How Business Structure Determines Loss Treatment

The legal form of your business is the primary factor in how a loss is handled for tax purposes. For the majority of small businesses, which operate as pass-through entities, a loss can directly impact the owner’s personal tax return. This category includes sole proprietorships, partnerships, S corporations, and most limited liability companies (LLCs). The defining characteristic of these structures is that the business itself does not pay income tax.

Instead of being taxed at the business level, the profits or losses are “passed through” to the individual owners. The owners report this income or loss on their personal tax returns on Form 1040. When the business incurs a loss, that loss can be used to offset other forms of income the owner might have, such as wages from another job or earnings from investments. This reduction in total income can lower the overall tax bill and may result in a refund of taxes that were overpaid.

C corporations operate under a different set of rules that create a separation between the business and its owners. A C corporation is a separate legal and taxable entity. When a C corporation experiences a loss, that loss remains within the corporation and does not pass through to the shareholders’ personal tax returns.

Shareholders of a C corporation cannot use the company’s loss to offset their personal income from other sources. The corporation itself must use the loss to reduce its own taxable income in a different year. While this provides a tax benefit to the corporation, it does not generate a direct tax refund for the individual owners.

Calculating and Applying a Net Operating Loss

A Net Operating Loss (NOL) for tax purposes is not simply the net loss shown on your business’s income statement. It is a specific calculation defined by the Internal Revenue Code where certain deductions are modified or excluded. For instance, non-business deductions, such as the standard deduction, can only be used to offset non-business income and cannot be used to increase the size of the NOL.

For owners of pass-through entities, the calculated business loss is reported on their personal tax return and works to reduce their Adjusted Gross Income (AGI). A lower AGI can make you eligible for certain tax credits or deductions, further reducing your tax liability and potentially increasing your refund.

The amount of business loss you can deduct in a single year is subject to several limitations.

• At-risk rules: These rules prevent you from deducting more than the amount you have personally invested in the business or for which you are personally liable. You cannot deduct losses funded by nonrecourse loans, where the lender’s only remedy is the collateral, not your personal assets.
• Passive activity loss rules: If you do not materially participate in the day-to-day management of the business, it is considered a passive activity. Losses from passive activities can only be used to offset income from other passive activities, not active income like W-2 wages.
• Excess business loss limitation: This rule places a cap on the total amount of net business losses an individual can deduct against non-business income in a year. For 2025, this threshold is $313,000 for single filers and $626,000 for those married filing jointly. Any business loss that exceeds this annual limit is treated as an NOL and must be carried forward to subsequent tax years.

Using a Loss for Past or Future Tax Years

When a Net Operating Loss is too large to be fully absorbed by your other income in the current year, or if it is limited, the unused portion is not lost. The default treatment for these NOLs is a carryforward. This means the remaining loss is carried to the following tax year to offset income in that future period.

An NOL can be carried forward indefinitely until it is fully used. However, a restriction applies to how these carryforwards can be used. The NOL deduction in a future year is limited to 80% of that year’s taxable income, calculated before the NOL deduction itself is taken. This limitation means that even with a large NOL carryforward, you may still have some tax liability in a profitable future year.

The ability to carry a loss back to a prior tax year to receive a refund of past taxes paid was eliminated for most businesses. The primary exception is for certain farming businesses, which may be permitted a two-year carryback for their losses.

Required Forms and Filing Procedures

The paperwork required to report a business loss and utilize any resulting NOL depends on your business structure and the action you are taking.

• Sole proprietorships or single-member LLCs: The business’s income and expenses are reported on Schedule C, “Profit or Loss from Business,” which is filed with your personal Form 1040. A net loss from Schedule C flows directly to your personal return to offset other income.
• Partnerships and S corporations: The business files its own informational tax return (Form 1065 or 1120-S). Each owner then receives a Schedule K-1, which details their share of the loss to be reported on their personal tax return, typically on Schedule E, “Supplemental Income and Loss.”
• Excess business losses: If your total business losses exceed the annual threshold, you must file Form 461, “Limitation on Business Losses.” This form is used to calculate the portion of your loss that is disallowed in the current year and treated as an NOL carryforward.
• Using an NOL carryforward: When you utilize an NOL carryforward from a prior year, you report it on your Form 1040. The NOL deduction is entered as a negative number on the “Other income” line of Schedule 1 (Form 1040), and you must attach a statement detailing the calculation.
• Claiming an NOL carryback: In the rare instances where a carryback is permitted, the faster method is to file Form 1045, “Application for Tentative Refund,” which has a strict filing deadline. The alternative method is to file Form 1040-X, “Amended U.S. Individual Income Tax Return,” for the prior year.