"I have rent and bills to pay regardless of whether I'm making money, that is the definition of making a loss."
That is not a loss. That is an exchange of value; you pay $100 for your heating bill and receive $100 of heating.
A loss is when you have some value, and it disappears, and you have no compensating value. Buying a stock at $100 and selling it at $50 is a transaction in which you have less money at the end than you had at the beginning, and where you also had no compensating value exchange
Normal taxpayers do have rights to do things like carry forward losses in many circumstances. Business do get to be not taxed on expenses, but there are conditions on that. You can tell there are conditions on that because you can't just form an LLC and declare all your expenses to be losses, because you won't meet the conditions for your expenses to be losses. Note that that is the source of the problem, "form an LLC" is something you can totally do very easily, it's the failure for your personal expenses to qualify that is the problem.
While it might be emotionally satisfying to tax businesses on expenses, it's not hard to think about it a bit and realize why letting taxpayers deduct all their expenses, or trying to tax businesses on their expenses even when they didn't make a profit, are both not great ideas. (Think about the incentives created. Taxpayers don't need any more incentives to spend all their money on "expenses" as it is, if you've seen the credit card debt statistics.)
> My understanding is "losses" is kinda vague if you own one of these "pass through" entities you can pay yourself a salary, have the "pass through" business loose money then pass that loss off against your personal income. I'm not a accountant so I might be wrong.
Say your pass-through entities has 100k in revenue. You could pay yourself 140k and mark down 40k of losses but that's financially disadvantageous because you're tax rate on the income will be higher than the tax rate on the losses. You're paying 13k in extra taxes to avoid paying 8k, donating an extra 5k to the IRS.
Most companies try to shift revenue from income to profits because it will reduce your total tax burden.
But a loss is just when expenses are greater than revenue. Deducting taxable income for a loss is just the same as deducting the expenses that caused the loss to be a loss.
I don't think it's about deducting expenses, otherwise this would be entirely moot because they'd deduct for expenses no matter whether it was a hit or a flop. I understood the article to be about deducting taxable income for a loss.
Deducting losses doesn't make losses profitable, it just eases the sting of the loss a little bit.
If you lose $100, and you get to deduct that $100 loss, then that saves you the taxes on $100, but unless the marginal tax rate is somehow greater than 100% then you have still lost money.
Not only are losses not taxed, but they are often deductible against other taxable (profit) income. I believe this is mostly out of a sense of fairness, and also because profitable business activities often start out as unprofitable, and we don't want to discourage that start-up phase, or we might not ever get profitable businesses.
edit: losses are not deductible in perpetuity, however. For small businesses, after several years of losses, the business is presumed to be a not-for-profit ("hobby") activity for which losses are not deductible. And larger businesses can only continue to generate losses by investors dumping more money in only to lose it. (U.S tax system)
>We want to incentivize profits
There is already plenty of incentive without any government intervention.
And as others have pointed out, taxes are heavily based on a ability to pay. For example, while cancelation of debt (forgiven loans) result in taxable income (U.S), there are exceptions for people who are insolvent (and therefore obviously can't really pay the tax).
Which is why you don't make losses; you just don't make much of a taxable profit after costs. (I am not an accountant.) I did this for a number of years with a little side software business. The business paid for the expenses associated directly with the business, but also computer/office stuff I might have bought anyway. The business turned a profit every year. Just not much of one.
This example is very confusing. If you buy a bunch of stuff to sell and don't sell it, then there is no income to pay taxes on. If you sell and make a profit, you pay tax on the profit. If you lose money you don't have profits to pay tax on.
From another poster's comment, it appears that I just didn't understand the article -- that it's always been possible to deduct for losses, but the question was, who's an ACTIVE investor. So I guess in MY hypothetical, I'd have gotten taxed on $25k, not $50k.
As to your hypothetical, though, my curiosity is piqued:
Let's say the Household's businesses are losing $250k a year of the Household's money.
Why should they pay tax on $500k of income? Their income is $250k in your hypothetical.
If the businesses ARE losing money, then the household as a unit has less income, so why not tax the household on its actual income?
Investment loses aren't tax credits. You don't magically get all the money back. You'll only "get back" whatever your marginal tax rate is. You'll still be out the remainder of the cash you forked over.
I’d love to count profits and losses relative to the best possible outcome in hindsight rather than the difference between what was spent to obtain an asset vs. what I got for it, but generally that’s not how the IRS sees things. A loss is not relative like that.
It’s pretty simple. I’m surprised more people don’t know about this.
it’s called net operating loss. when you’ve lost money over the last ten years you can deduct those losses from your gains and only pay taxes on the difference.
Makes senses, right? A business needs to cover the losses before there is really a “profit” to pay taxes on. But this ends up incentivizing losing money, and makes the silicon valley business model of raising a ton of money and running at a loss to try and dominate the market a lot more profitable
this is really hard to quantify independently, and they can use this figure to inflate their losses to claim more taxation benefit than otherwise deserved.
Why can't i say that I "lost" 12million developing my indie game, and therefore, claim some taxes off my casual contract work?
That is not a loss. That is an exchange of value; you pay $100 for your heating bill and receive $100 of heating.
A loss is when you have some value, and it disappears, and you have no compensating value. Buying a stock at $100 and selling it at $50 is a transaction in which you have less money at the end than you had at the beginning, and where you also had no compensating value exchange
Normal taxpayers do have rights to do things like carry forward losses in many circumstances. Business do get to be not taxed on expenses, but there are conditions on that. You can tell there are conditions on that because you can't just form an LLC and declare all your expenses to be losses, because you won't meet the conditions for your expenses to be losses. Note that that is the source of the problem, "form an LLC" is something you can totally do very easily, it's the failure for your personal expenses to qualify that is the problem.
While it might be emotionally satisfying to tax businesses on expenses, it's not hard to think about it a bit and realize why letting taxpayers deduct all their expenses, or trying to tax businesses on their expenses even when they didn't make a profit, are both not great ideas. (Think about the incentives created. Taxpayers don't need any more incentives to spend all their money on "expenses" as it is, if you've seen the credit card debt statistics.)
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