Net operating losses (NOLs) are generated when a business's deductions for the tax year are more than its income. NOLs may be carried back 2 years to obtain a current refund and then carried forward for up to 20 years. Under a provision of the American Recovery and Reinvestment Act of 2009 (ARRA), small businesses, defined as those that averaged less than $15 million in gross receipts over the past three years, will be permitted to carry back 2008 losses for up to five years, instead of two. The normal carryback period of two years will apply to losses incurred in 2009.

Alternately, you may waive the carryback and carry all loss forward. Foregoing the carryback period could be beneficial if your marginal tax rate in the carryback years was unusually low.

Corporate capital losses are also currently deductible but only to the extent of capital gains. A 3-year carry-back and a 5-year carry-forward period apply.

If your business is not incorporated or operates as a partnership, S corporation, or LLC, you may deduct business losses on your personal tax return. But, losses may be limited because of the at-risk or passive activity loss rules. Keep in mind that you can only deduct your share of losses to the extent that you have sufficient income tax basis for your investment.

Also take advantage of other possible loss deductions. You may deduct all or some bad business debts as ordinary losses when your good faith collection efforts fail. Inventory losses, casualty and theft losses (to the extent not covered by insurance), and losses on the sale of business assets may also be deductible.