This has been a difficult year, and your business may have made a tax loss.

A tax loss is when the total deductions you can claim, excluding gifts, donations and personal superannuation contributions, are greater than your total income for the income year.

If you make a tax loss, you may be able to:

• offset the loss in the same income year against other assessable income; or
• carry forward the loss and claim it as a business deduction in a later income year (note that only companies can carry a loss back to offset against profits of an earlier income year - sole traders, trusts and partnerships cannot do that).

Meeting the 'non-commercial loss' tests

If you're a sole trader or in a partnership of individuals and want to offset a tax loss, first check if the business activity meets at least one of the 'commerciality' tests under the non-commercial loss rules. (Those rules do not apply to losses made by primary producers and professional artists whose income from other sources is less than $40,000 or to losses made by companies and trusts.)

What are the 'non-commercial loss' tests?

Broadly, the four non-commercial loss tests are:

• the Assessable income test - this is satisfied if the business activity generates at least $20,000 of assessable income a year (or would reasonably be estimated to generate at least $20,000 of assessable income if the activity were carried on for the whole year);
• the Profits test - this is satisfied if the business activity has made a profit in at least 3 of the last 5 tax years, including the current year (in the case of a partnership, the test looks at the individual partner's share of partnership income and deductions);
• the Real property test - this is satisfied if the total value of real property used on a continuing basis in carrying on the business activity is at least $500,000;
• the Other assets test - this is satisfied if the total value of other assets (eg depreciating assets, trading stock and intellectual property) used on a continuing basis in carrying on the business activity is at least $100,000.

If you meet one of the 'non-commercial loss' tests, then you can offset the loss against other assessable income (such as salary or investment income) in the same income year.

If you don't meet any of the 'non-commercial loss' tests, you can defer the loss or carry it forward to future years. For example, you can offset it when you next make a profit.

Non-commercial losses made by an individual whose adjusted taxable income exceeds $250,000 are quarantined.

The rules for record keeping still apply when it's related to business losses. You need to keep records for 5 years for most transactions. However, if you fully deduct a tax loss in a single income year, you only need to keep records for 4 years from that income year.