How to offset business losses for tax deductions

If your business has incurred losses, leveraging them for tax deductions requires navigating through specific tests designed to prevent misuse of tax benefits. Here’s a step-by-step guide:

1. Income Requirement:

  • Adjusted income (excluding business loss) must be under $250,000.

2. Tests to Claim Loss:

  • Test One – Assessable Income:
    • Business turnover must be at least $20,000.
    • For part-year trading, estimate income for a full 12 months.
  • Test Two – Profits:
    • Tax profit in three out of the past five years, including the current year.
  • Test Three – Real Property:
    • Continuous use of real property (excluding private house).
    • Property’s market value should be at least $500,000.
  • Test Four – Other Assets:
    • Business assets’ combined value (excluding real property and vehicles) must be at least $100,000.
    • Plant and equipment valued at tax written down value, trading stock valued at cost or market value.

3. Exceptions:

  • Primary Production Business:
    • If the loss is from a primary production business and income from other sources is under $40,000, you can claim the loss without the above tests.

4. Grouping Business Activities:

  • If operating multiple similar businesses, tests can be grouped.
  • For dissimilar businesses, apply tests individually.

5. Carrying Forward Losses:

  • If unable to pass a test in a year, carry forward the loss.
  • Continue carrying forward until a test is passed for claiming.

6. Special Consideration:

  • If income exceeds $250,000 or unique circumstances arise, seek ATO permission through a private ruling.

Navigating these tests ensures legitimate deductions without exploiting tax benefits. For personalized advice and assistance, consult with our experts at Boa & Co.

Ready to optimize your tax strategy? Contact Boa & Co. at 1300 952 286 for expert guidance.

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