You cannot deduct more for a business expense than the amount you
actually spend. There is usually no other limit on how much you can
deduct if the amount is reasonable. However, if your deductions are
large enough to produce a net business loss for the year, the tax loss
may be limited.
Recovery of amount deducted.
If you recover part of an expense in the same tax year for which
you would have claimed a deduction, reduce your expense deduction by
the amount of the recovery. If you have a recovery in a later year,
include the recovered amount in income. However, if part of the
deduction for the expense did not reduce your tax, you do not have to
include all the recovery in income. Exclude the part that did not
reduce your tax.
For more information on recoveries and the tax benefit rule, see
Publication 525.
Payments in kind.
If you provide services to pay a business expense, the amount you
can deduct is the amount you spend to provide the services. It is not
what you would have paid in cash.
Similarly, if you pay a business expense in goods or other
property, you can deduct only the amount the property costs you. If
these costs are included in the cost of goods sold, do not deduct them
as a business expense.
Limits on losses.
If your deductions for an investment or business activity are more
than the income it brings in, you have a net loss. There may be limits
on how much, if any, of the loss you can use to offset income from
other sources.
Not-for-profit limits.
If you do not carry on your business activity with the intention of
making a profit, you cannot use a loss from it to offset other income.
See Not-for-Profit Activities, later.
At-risk limits.
Generally, a deductible loss from a trade or business or other
income-producing activity is limited to the investment you have "at
risk" in the activity. You are "at risk" in any activity for
the following items.
- The money and adjusted basis of property you contribute to
the activity.
- Amounts you borrow for use in the activity if:
- You are personally liable for repayment, or
- You pledge property (other than property used in the
activity) as security for the loan.
For more information, see Publication 925.
Passive activities.
Generally, you are in a passive activity if you have a trade or
business activity in which you do not materially participate during
the year, or a rental activity. In general, deductions for losses from
passive activities only offset your income from passive activities.
You cannot use any excess deductions to offset your other income. In
addition, passive activity credits can only offset the tax on net
passive income. Any excess loss or credits are carried over to later
years. For more information, see Publication 925.
Net operating loss.
If your deductions are more than your income for the year, you may
have a "net operating loss." You can use a net operating loss to
lower your taxes in other years. See Publication 536
for more
information. See Publication 542
for information about net operating
losses of corporations.
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