An ordinary loss is the amount by which normal and regular expenses exceed revenues in a business or individual operation. An ordinary loss stands in contrast to capital losses which occur when assets are sold for less than their cost. Often, ordinary losses are much more frequent for taxpayers than capital losses and their impact can be greater.

Both individuals and businesses can have ordinary losses, though the type and amount of deductible deductions will depend on whether the taxpayer is an individual or business. Individuals are not able to deduction ordinary losses, but businesses are able to deduct ordinary losses up to the amount of other ordinary income they earned. This means that businesses can offset ordinary losses with ordinary income, whereas individuals must carry forward any capital losses to future years in order to realize any tax benefit.

Ordinary losses are especially common in highly competitive industries or any type of business in which income fluctuates. Any business that experiences cost overruns, contractual disputes, theft, or any other type of operational disruption can experience an ordinary loss. Businesses that are just starting out are especially susceptible to ordinary losses due to the inherent risks associated with launching a new business.

The tax deduction from ordinary losses can be an important form of relief for businesses. Deducting ordinary losses can shrink the taxable income of a business and reduce the amount of taxes it must pay in a particular year. Furthermore, the deduction can be applied to a business’s previous 3 tax years, allowing the potential for even more savings.

To sum up, ordinary losses are a normal occurrence in business, but businesses can mitigate the financial impact by taking advantage of tax deductions. Though ordinary losses don’t have the same benefit for individuals, businesses can take advantage of deductions up to the amount of ordinary income they earned in a given year. Furthermore, businesses can also look to deductions in the previous three tax years for the potential of even more savings.