In the past couple of years, the pandemic has seen various small- and medium- sized businesses close down or suffer huge financial losses. Whether it is a business or investment, and be it due to external factors or a wrong strategy on your part, the resulting losses can be devastating and can throw your personal and professional life out of gear. Therefore, it is a good idea to not only to be prepared for such a situation, but also learn how to deal with it if it happens.
Whether it is a business or investment, and is it due to external factors or a wrong strategy on your part, the resulting losses can be devastating and can throw your personal and professional life out of gear. Therefore, it is a good idea to not only to be prepared for such a situation, but also learn how to deal with it if it happens.
Individual Returns
Many small businesses, especially those just launching, are structured in ways that allow their owners and shareholders to incorporate business losses into their personal filings. A sole proprietor pays business taxes along with her individual tax return, including its income along with her own on her annual 1040 form. If her business suffers a loss, it’s deducted from her other income during the year, or income from other family members on a joint return. Businesses operating as an LLC, S corporation or partnership operate in similar fashion, with profit and loss taken on the personal returns of shareholders rather than on a return for the business as its own entity.
Make sure you are not Impulsive
It is very easy to get impulsive when you are managing huge financial losses. This leads to rash decisions like burning through all your savings or mortgaging the assets that you have remaining to make up for these losses or to build capital for your business. Business owners also feel the need to withdraw any investments that they have made because of the fear of losing more money.
One of the most important business tips is to think of the long-term effect of any decision that you might take and never act in the heat of the moment. If needed, make a note of all your liabilities and also list the pros and cons of any financial decision that you take. Since you have already lost a lot of money, it is not advisable to run through any more funds that you have to keep you going with your expenses and overheads.
Diversify
Don’t put all your eggs in one basket. Always invest 20-30% of your holdings in different financial instruments such as gold, debt and equity, so that your personal life and family don’t suffer in case of a huge loss. “This is especially true in case of market-linked investments in the current condition, when the markets are at an all-time high. Mumbai-based Financial Planner. Never mix business capital with personal assets. By using the latter to capitalise the former, you run the risk of impacting your family and financial goals.
Take Stock of the Situation
Instead of a knee-jerk reaction, you will need to consider the reason for the losses and take adequate steps to reinstate yourself.
Set off Losses to Cut Tax
There is a small silver lining if you suffer capital losses in a business or an investment. You could set these off against capital gains and reduce your tax liability. However, the losses can be set off only against a particular type of capital gain and depending on whether it is short term or long term. So, if you have redeemed money from equity funds in less than a year and suffered a loss, you could set it off against a long-term gain in funds in the next financial year. If you have not made any gains in that financial year but have filed your tax returns by the due date, you could also carry forward your losses, depending on the type of loss. For instance, in case of a loss from house property, you can carry it forward for eight years, but only four years in case of a loss in speculative business.
Emergency Fund
This is a basic requirement for any household, more so if you are self-employed or engaged in risky investments. You should have emergency funds in place for survival for at least six months. If not, make sure that you have other investments and assets that can be liquidated, when needed.
Relook at your Current Expenses
Often the possible solutions to any complex problems are much simpler than you would imagine. One common business advice provided by experts is to revisit your expenses and cut back on them until you have recovered your losses.
For instance, most companies chose to downsize and let go of their brick-and-mortar office spaces during the pandemic. While this seems like a difficult choice to make, it might be the need of the hour for your brand. If you are a sole business owner, your personal expenses can also impact your business. Simple things like cutting down on eating out or other unwanted expenses can help you increase your cash flow significantly.
If cutting down on your expenses does not seem like the right choice, there are other business tips and tricks that you can try out. For instance, increasing your income from other resources is a great starting point.
Pressure for Profit
The IRS doesn’t allow a business to claim a loss forever. The general rule is that your operation qualifies as a business if it shows a profit three times in a five-year period. Otherwise, it’s considered a hobby, resulting in different treatment at tax time. If your business is your sole or primary source of income, the IRS also may take a closer look at your return if it shows losses too often, wondering how you’re maintaining your standard of living with negative income. Keeping detailed records that prove the business losses can help support your case should the IRS choose to audit your return.
Health Insurance
You should also have adequate medical cover of 5-10 lakh because if you, or any of your family members, were to fall sick when you suffer a huge monetary loss, at least your medical bills will be taken care of. Insure your loans: If you have taken any big loans such as a home loan, make sure that these are covered, so that if you suffer a huge financial loss and are unable to continue with the EMIs, at least the loan can be repaid.