Will my wife's business losses offset my income on a joint tax return?
"First, filing status. If you and your wife are legally married, you should be filing your tax returns as married, either jointly or separately. In the US, ""head of household"" has a specific meaning and is for unmarried people who are supporting one or more relatives, per the IRS. If you are working full-time and your wife is not, then likely you will file a joint return, including all your income and all the expenses for your wife's business. So yes, the losses in her business will offset your income. Depending on how complex things are, you may want to hire a professional to help with your taxes. The rules for what can and cannot be deducted as a business expense can be opaque."
I'm not an expert, but here's my $0.02. Deductions for business expenses are subject to the 2% rule. In other words, you can only deduct that which exceeds 2% of your AGI (Adjusted Gross Income). For example, say you have an AGI of $50,000, and you buy a laptop that costs $800. You won't get a write-off from that, because 2% of $50,000 is $1,000, and you can only deduct business-related expenses in excess of that $1,000. If you have an AGI of $50,000 and buy a $2,000 laptop, you can deduct a maximum of $1,000 ($2,000 minus 2% of $50,000 is $2,000 - $1,000 = $1,000). Additionally, you can write off the laptop only to the extent that you use it for business. So in other words, if you have an AGI of $50,000 and buy that $2,000 laptop, but only use it 50% for business, you can only write off $500. Theoretically, they can ask for verification of the business use of your laptop. A log or a diary would be what I would provide, but I'm not an IRS agent. "I don't think it really matters, my understanding is that as a sole trader there is no distinction between your personal and business tax affairs. The distinction between your personal and business account is mainly for your own personal benefit to make it easier to differentiate between ""wages"" and retained earnings. If you want to maintain this distinction with regard to tax then you need to somehow differentiate between tax paid on your ""wage"" and tax paid on retained earnings. You could then either make two payments, or pay from either and transfer the difference from the other. Either way, it's just a matter of perspective rather than something with a physical difference." Ah, I did some more research and apparently Rental Income is considered Passive Income, and as such the IRS does not allow a net loss to exist, but you can carry the loss over into the next year. https://www.irs.gov/taxtopics/tc425.html Generally, losses from passive activities that exceed the income from passive activities are disallowed for the current year. You can carry forward disallowed passive losses to the next taxable year. A similar rule applies to credits from passive activities. So in the event in a loss on my rental business activity, I simply pay no tax on it, and deduct the remainder in income in 2017 from taxes. I don't make any changes to my Consulting income at all. "In the US you are not required to have a corporation to use business expenses to offset your income. The technical term you need is ""deducting business expenses"", and in matters of taxes it's usually best to go straight to the horse's mouth: the IRS's explanations Deducting Business Expenses  Business expenses are the cost of carrying   on a trade or business. These expenses are usually deductible if the   business operates to make a profit.  What Can I Deduct? Cost of Goods   Sold, Capital Expenses, Personal versus Business Expenses, Business Use   of Your Home, Business Use of Your Car, Other Types of Business Expenses None of this requires any special incorporation or tax arrangements, and are a normal part of operating a business.  However, there is a bit of a problem with your scenario. You said you ""invested"" into a business, but you mentioned buying specific things for the business which is not generally how one accounts for investment. If you are not an owner/operator of the business, then the scenario is not so straight-forward, as you can't simply claim someone else's business expenses as your own because you invested in it. Investments are taxed differently than expenses, and based upon your word choices I'm concerned that you could be getting yourself into a bit of a pickle. I would strongly advise you to speak with a professional, such as a Certified Public Accountant (CPA), to go over your current arrangement and advise you on how you should be structuring your ongoing investment into this shared business. If you are investing you should be receiving equity to reflect your ownership (or stock in the company, etc), and investments of this sort generally cannot be deducted as an expense on your taxes - it's just an investment, the same as buying stock or CDs. If you are just buying things for someone else's benefit, it's possible that this could be looked upon as a personal gift, and you may be in a precarious legal position as well (where the money is, indeed, just a gift). And gifts of this sort aren't deductible, either.  Depending on how this is all structured, it's possible that you should both consider a different form of legal organization, such as a formal corporation or at least an official business partnership. A CPA and an appropriate business attorney should be able to advise you for a nominal (few hundred dollars, at most) fee. If a new legal structure is advisable, you can potentially do the work yourself for a few hundred dollars, or pay to have it done (especially if the situation is more complex) for a few hundred to a few thousand. That's a lot less than you'd be on the hook for if this business is being accounted for improperly, or if either of your tax returns are being reported improperly!" For some reason this can result in either   the flow through income being UNTAXED or the flow through income being   taxed as a capital gains. Either way this allows a lower tax rate for   LLC profits. I'm not sure that correct. I know it has something to do   with capital accounts. This is incorrect. As to capital accounts - these are accounts representing the members/partners' capital in the enterprise, and have nothing to do with the tax treatment of the earnings. Undistributed earnings add to the capital accounts, but they're still taxed. Also, is it true that if the LLC loses money, that loss can be offset   against other taxable income resulting in a lower total taxation? It can offset taxable income of the same kind, just like any other losses on your tax return. Generally, flow-through taxation of partnerships means that the income is taxed to the partner with the original attributes. If it is capital gains - it is taxed as capital gains. If it is earned income - it is taxed as earned income. Going through LLC/partnership doesn't re-characterize the income (going through corporation - does, in many cases). That's really not something that can be answered based on the information provided. There are a lot of factors involved: type of income, your wife's tax bracket, the split between Federal and State (if you're in a high bracket in a high income-tax rate State - it may even be more than 50%), etc etc. The fact that your wife didn't withdraw the money is irrelevant. S-Corp is a pass-through entity, i.e.: owners are taxed on the profits based on their personal marginal tax rates, and it doesn't matter what they did with the money. In this case, your wife re-invested it into the corp (used it to pay off corp debts), which adds back to her basis. You really should talk to a tax adviser (EA/CPA licensed in your State) to learn how S-Corps work and how to use them properly. Your wife, actually, as she's the owner. This may not exactly answer your question but, as a small business owner, I would highly recommend having a professional handle your taxes. It is worth the money to have it done correctly rather than doing something wrong and getting audited or worse having penalties assessed and owing more than you thought would be possible. I would recommend this especially if this is how you make your primary income, you can always write it off as a business expense. Just from my own experience (I am not an accountant): In addition to counting as 'business income' (1040 line 12 [1]) your $3000 (or whatever) will be subject to ~15% self-employment tax, on Schedule SE.  This carries to your 1040 line ~57, which is after all your 'adjustments to income', exemptions, and deductions - so, those don't reduce it.  Half of the 15% is deductible on line ~27, if you have enough taxable income for it to matter; but, in any case, you will owe at least 1/2 of the 15%, on top of your regular income tax. Your husband could deduct this payment as a business expense on Schedule C; but, if (AIUI) he will have a loss already, he'll get no benefit from this in the current year.   If you do count this as income to you, it will be FICA income; so, it will be credited to your Social Security account. Things outside my experience that might bear looking into:  I suspect the IRS has criteria to determine whether spousal payments are legit, or just gaming the tax system.  Even if your husband can't 'use' the loss this year, he may be able to apply it in the future, when/if he has net business income. [1] NB: Any tax form line numbers are as of the last I looked - they may be off by one or two. "As long as the losing business is not considered ""passive activity"" or ""hobby"", then yes. Passive Activity is an activity where you do not have to actively do anything to generate income. For example - royalties or rentals. Hobby is an activity that doesn't generate profit. Generally, if your business doesn't consistently generate profit (the IRS looks at 3 out of the last 5 years), it may be characterized as hobby. For hobby, loss deduction is limited by the hobby income and the 2% AGI threshold." Since from the question it seems that you're talking about the US taxation, I'll assume that. You can definitely continue filing jointly. Being members of a partnership has no bearing on how you file your own tax return. The partnership will distribute K-1 to each of you separately, but you'll report both of them on the same return. "I agree with some of the points of the other answers but why not avoid all the guesswork? I highly recommend you not charge him now. Wait until the end of the year when you have much more information about both of your companies and then you can run the numbers both ways and decide if it would benefit you (collectively). If either of your businesses runs on a cash basis and you decide to invoice, just make sure the check is deposited before Dec 31. Update: If you want to do this for 2016, at least your husband's business would have to be using an accrual basis (since it's too late to take the deduction on a cash basis). Simply run the numbers both ways and see if it helps you. If it doesn't help enough to warrant it for 2016 you could rerun the numbers near the end of 2017 to see if it helps then. Diclaimer: I think it's OK to do this type of manipulation for the scenario you described since you have done (or are doing) the work and you are charging a reasonable fee, but realize that you shouldn't manipulate the amount of the invoice, or fabricate invoices. For example, you shouldn't ever think about such things as: ""If I invoice $50K instead of $3K, will that help us?""" Only if your work on the side is making you at least £60,000 profit a year. The overheads are just not worth it if you make less. Working as a sole trader, you can still claim for expenses incurred in the course of your business. You can also claim a percentage of your computer costs, even though you may use the computer for gaming. This is not unreasonable as the computer is necessary for your work. The Inland Revenue accept the fact that some assets are part work-related. In your case, as a web and mobile phone developer, I expect the percentage to be at least half, if not a lot more. If you need to travel in the course of your work you can claim a percentage for your car. You can include other small expenses such as telephone, stationery, electricity etc but don't go overboard. The important point to remember is that you must be able to defend the expenses claimed as work-related, so long as you can do this there is no problem. Remember to keep good records of all your expenses. This is on-going throughout the year and is much more work than filling out your tax return. The software on the IR self-assessment site is excellent, so it's conceivable that you may not need an accountant if you are prepared to do your own tax return. However, if you feel unsure employ an accountant initially and take it from there. Eric is right regarding the tax, i.e. ordinary income on discount, cap gain treatment on profit whether long term or short.  I would not let the tax tail wag the investing dog. If you would be a holder of the stock, hold on, if not, sell. You are considering a 10-15% delta on the profit to make the decision.  Now. I hear you say your wife hasn't worked which potentially puts you in a lower bracket this year. I wrote Topping off your bracket with a Roth Conversion which would help your tax situation long term. Simply put, you convert enough Traditional IRA (or 401(k) money) to use up some of the current bracket you are in, but not hit the next. This may not apply to you, depending on whether you have retirement funds to do this. Note - The cited article offers numbers for a single person, but illustrates the concept. See the tax table for the marginal rates that would apply to you. Check out personal finance. But, my guess is no. Given you are married and you were prepared to contribute $x out of the entire family pot, why don't they just contribute $x from their portion of the entire family pot? Net effect should be similar or identical. (I'm not an accountant nor married, so enjoy the grain of salt). As far as accounting  goes, if you speak with a CPA, you may be able to reduce the business tax liability.  So... the company buys the truck, deducts it, and the adjusted gross income drops, so he'd pay less tax.  Or something.  You said anything helps, hope you meant it!