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It’s not uncommon for businesses to operate at a loss, especially those still finding their feet.
But if your business is losing more money than it’s bringing in, you’ll need to make some changes to keep your business running.
Operating at a loss is when you’re spending more money than is coming in to the business.
Businesses often operate at a loss temporarily when starting out or in periods of growth. This is okay if you’ve got enough in the bank to cover the costs of running your business until your income picks up.
But if your business is frequently operating at a loss because of slow sales, you’ll need to make some changes to how your business is running. Think about consulting an advisor to help you turn things around.
You may need to raise or borrow money to cover costs until the payment is made.
Try these steps:
1. Reduce your expenses.
2. Increase your sales.
3. Get advice — an advisor may be able to help you turn it around.
Advice from an accountant or business advisor can help you get your business back on track and avoid trouble ahead.
Test a small amount first — spend $100 and see what your results are instead of spending $1,000 upfront.
If you claim a loss in your tax return, you can carry it forward to lower your income in the next tax year — and therefore reduce your tax bill.
Report the loss in your Individual tax return(external link) (IR3). Inland Revenue will then let you know the amount that can be carried forward to the next tax year.
If the loss is greater than your income, the difference can be used to lower your taxable income in following years.
How to claim a loss(external link) — Inland Revenue
In most cases, companies operating at a loss don’t have to pay income tax.
A company may be able to transfer its loss to another company, or carry the loss forward to future years.
To carry the tax loss forward, you’ll need to:
Companies need to calculate voting interest in a specific way. And groups of companies looking to bring losses forward may be prevented from doing so by being in a ‘market value circumstance’. See Inland Revenue’s When companies make losses(external link) for more details.
If you’re considering bringing losses forward for tax purposes, you should consult a tax adviser. Ask around the people you know for recommendations.
Avoid these common pitfalls: