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What to do if your business is operating at a loss

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.

If you report a loss in your tax return, can you carry it forward to lower your income the next tax year?

What operating at a loss means

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.

How to know if you’re operating at a loss

  • You don’t have enough money to pay your bills.
  • Your bank balance is negative and you don’t know how to get it positive again.
  • You’re not selling the amount you needed to in your forecast, eg if your business model is reliant on selling ten cups of coffee a day and you’re selling three.
If you know you’ve got money coming in the future — like a big invoice being paid — that will cover your loss, this is an issue with your cash flow.

If you know you’ve got money coming in the future — like a big invoice being paid — that will cover your loss, this is an issue with your cash flow.

You may need to raise or borrow money to cover costs until the payment is made.

What to do if you’re operating at a loss

Try these steps:

1.  Reduce your expenses.

  • Is there anything you can cut from your spending?
  • Can you reduce the amount of drawings you’re taking from the business?
  • Try to negotiate better deals from your suppliers.
  • Sell assets you’re no longer using.

2.  Increase your sales.

  • Can you charge more for your product or service?
  • How can you sell more of your product or service?
  • Can you get more customers?

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.

You may need to spend more on marketing to get more customers.

You may need to spend more on marketing to get more customers.

Test a small amount first — spend $100 and see what your results are instead of spending $1,000 upfront.

Claiming losses at tax time

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.

Sole traders and partnerships

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

A picture of a sole trader.

Companies

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:

  • report it in your company’s Income tax return (external link) (IR4)
  • meet the shareholder continuity test — a group of shareholders must have combined voting interest of 49% or more from the beginning of the year the loss was incurred to the end of the year it’s offset.

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.

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Common mistakes

Avoid these common pitfalls:

  • Having your head in the sand about being in a loss position.
  • Not having a plan in place to get back out of it.
  • Purchasing things you can’t pay for — if you go to a supplier when you know you can’t pay the invoice, you’re operating in an insolvent position and can be made bankrupt.

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