TF.4 The IRS Cares About Tax Losses and You Should Too

Form 1040 is a summary of many forms and schedules. There are many kinds of income (wages, interest, dividends, income from sales of assets, net income from business, etc). All of those are totaled to come to the total amount of taxable income. So if any of those numbers are negative that negative reduces your total taxable income. If you have wage income (W-2 from a job) and farm losses, your farm losses reduce your wage income and you owe less taxes.

Generally losses offset income and reduce taxes. 

The IRS is as concerned with limiting the losses you can take as they are with ensuring you report all of your income. 

There are many complex rules limiting how you may use losses to offset income. Losses may be limited, suspended, disallowed, carried forward and carried back. These are all advanced tax topics. 

If you have tax losses and other taxable income, you should consult a knowledgeable tax preparer. 

For more information on special rules related to business losses, consult a tax professional or see IRS Form 461 and instructions and Publication 925 Passive Activities and At-Risk Rules

This resource is derived from materials developed by the University of Arkansas School of Law Agricultural Tax Training as part of the Agricultural Financial, Tax and Asset Protection (AgFTAP) partnership with the University of Arkansas Southern Risk Management Education Center and others.