Some of the richest people in the world lost millions, maybe billions this year, and they’re still smiling. What do they know that you don’t know?
The secret is simple. They know how to turn a loss into an asset.
If you’re like a lot of small business owners that I meet, you probably missed a lot of deductions when you first started your business. Did you remember to take the deduction for the fax machine, printer, copier, desk, computer, cell phone, and all those supplies when you first started your business? You might have reasoned that it didn’t matter because you had a loss anyway.
That’s one end of the spectrum. I’ve also met with new clients who have gone nuts with accelerating deductions (a good technique in the right circumstances) and now have a bunch of suspended losses. When you have a suspended loss that means that while your tax return shows a loss, you didn’t get to take any benefit from it. I hate suspended losses, because once they’re locked up it’s often hard to get to those losses unless you actually sell the business or investments.
With any loss, first consider whether you can take advantage of it. Some of the things to consider: type of investment (real estate has loss limitations, paper investments have even more limitations), other income that you want to offset from a business/investment loss (typically this is W-2 income) and what is your basis in the business/investment (without basis, you can’t take a loss).
The easiest loss to take advantage of is a business loss. If you end up with a Net Operating Loss (NOL) for the year, this loss can usually be carried back or carried forward. That means you might get the immediate benefit of the loss against taxes you paid in the past (ie, a refund check in 30 days or so) or against taxes you’re going to pay in the future year.
A loss can be just like money in the bank. Get good advice if you are looking at losses. Just like there are strategies for keeping more of the money you make, there are also strategies for turning losses into gold.