What if your stream loses money- deducting business losses
It’s never fun when your business loses money. However, it’s a fact of life for many businesses, especially in their initial years of operation. Once the machine is running smoothly you’re all set but until then it can be hard! Let’s look at what you can do if your stream loses money in a year. If you need a refresher on tax basics, check here or here!
As always, I’m not an accountant so if you feel you may need to take a loss work with a tax professional. Let me know if you need a referral!
What counts as a business loss?
You have a business loss when the income from your business is less than your expenses. This could be because you had high startup expenses, your business started near the end of the year, or you just didn’t have much in income.
What do you do with a business loss?
You can write a business loss off against other income! For instance, if my business lost money this year my wife and I could use that loss to reduce our reported income. She works and has a great job so we’d be slightly reducing the amount we owe in taxes. It’s a truly minor perk from having a business that loses money.
This can be complicated by the type of business entity you select. If you’re a sole proprietor, as most are, then your business loss goes straight to your tax return. If you are an LLC, S corporation, or partnership then your percentage of the business flows to your return. However, if you’re a C corporation (if you are as a streamer, wtf are you doing?) then you can’t take the loss on your personal return.
What’s a net operating loss?
A net operating loss (NOL) happens when the loss from your business reduces your adjusted gross income (AGI) enough that you have earned negative income over the course of the year, according to the IRS. So if your spouse earned $30k, you lost $10k in your business, and you took the standard deduction and personal exemptions ($20.8k for a married couple) then you’d have a $800 NOL. That’s $30k-$10k-$20.8k or -$800.
You can do two things with a NOL. First, you can carry it back to your past tax returns. This means that you can amend old returns (up to 2 years back) to reduce your stated income by this year’s NOL. That would reduce how much you owed in tax and could get you some relatively quick cash back.
Second, you can carry it forward. This means that you can write off this year’s NOL against future income. Say that next year your spouse earned $40k, your business netted $20k, and you took the standard deductions and exemptions again. Now you’d have $40k + $20k – $20.8k – $800 or $38.4k in income.
Important notes
Make sure you’re not falling afoul of IRS hobby rules! We’ve discussed the difference between a business and a hobby in the past. Check out this article from TurboTax for some more details on business vs hobby.
Conclusion
Hopefully, this article doesn’t apply to you. However, if you’re just starting out in your streaming career and working another job this could be a nice way to reduce your current taxes that you owe. Again, make sure that you’re talking with a tax preparer before unilaterally deciding that you can write off a business loss. It could be that the IRS would still consider your stream a hobby.
You don’t have to figure this out alone. This is what we do- help streamers make great money decisions. If that’s something that sounds interesting to you reach out me or schedule some time for a free consult. You can check out what I do here. I’m not an accountant but my job is to find these kinds of opportunities and connect you with the people who can do the calculation work.
