An ordinary loss, in the realm of finance, refers to a specific type of loss incurred by individuals or businesses that is considered to be a normal and customary expense within their trade or business
operations. It is a tax term used to describe losses that are deductible against ordinary income, providing a means for taxpayers to offset their taxable income and potentially reduce their overall tax liability
To qualify as an ordinary loss, the loss must meet certain criteria outlined by the Internal Revenue Service (IRS) in the United States. Firstly, the loss must be incurred in the ordinary course of conducting a trade or business. This means that the loss must arise from activities that are customary and typical for that particular industry or profession. It should not be an extraordinary or unusual event that is unrelated to the normal operations of the business.
Secondly, the loss must be bona fide and actually sustained during the tax year. This requires that the loss is real and not merely hypothetical or speculative. It should be supported by evidence and documentation, such as financial records, invoices, receipts, or other relevant documents that substantiate the occurrence and amount of the loss.
Furthermore, an ordinary loss should not be considered a capital loss. Capital losses typically arise from the sale or disposition of capital assets, such as stocks, bonds, real estate
, or other investments. While capital losses are subject to specific rules and limitations, ordinary losses are generally more advantageous for taxpayers as they can be fully deducted against ordinary income without any limitations.
It is important to note that ordinary losses are typically deductible in the year they are incurred. However, if the loss exceeds the taxpayer's total income for that year, it may be possible to carry back the excess loss to prior years or carry it forward to future years to offset taxable income in those periods.
In summary, an ordinary loss in finance refers to a deductible loss incurred in the normal course of conducting a trade or business. It must meet specific criteria set by the IRS, including being ordinary and customary, bona fide, and supported by evidence. By deducting ordinary losses from ordinary income, taxpayers can potentially reduce their tax liability and mitigate the financial impact of losses incurred in their business operations.