Tax Loss Harvesting for Business Owners: Selling Depreciated Assets and Recognizing Business Losses
Tax loss harvesting is commonly associated with investment portfolios (selling stocks at a loss to offset capital gains), but business owners have analogous strategies for their business assets. Selling equipment for less than its adjusted basis, writing off worthless inventory, and recognizing uncollectable receivables all generate deductible losses that reduce taxable income.
Business asset loss strategies:
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Selling depreciated equipment at a loss: If equipment has an adjusted basis (original cost minus depreciation taken) higher than its current market value, selling it generates an ordinary loss under IRC 1231. The loss offsets ordinary income (not limited to capital gains).
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Abandoning assets: If equipment becomes worthless (broken beyond repair, obsolete technology), the business can write off the remaining adjusted basis as an ordinary loss. Document the abandonment (date, reason, disposal method).
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Writing off worthless inventory: Inventory that cannot be sold (expired, damaged, obsolete) is written off by reducing ending inventory, which increases COGS and reduces taxable income.
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Bad debt deduction: Accounts receivable that become uncollectable can be deducted as a bad debt under IRC 166. For cash-basis taxpayers, this only works if the income was previously included (which it was not, since cash-basis taxpayers recognize income when received). Accrual-basis taxpayers, who recognized the income when billed, can deduct the bad debt.
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Section 1231 losses: Losses from the sale of business property held for more than one year are treated as ordinary losses (fully deductible against ordinary income), not capital losses (limited to $3,000/year net deduction against ordinary income).
When should a business owner sell losing assets?
What about the excess business loss limitation?
Under IRC 461(l), excess business losses (business losses exceeding business income by more than $305,000 for single filers or $610,000 for MFJ in 2025) aren’t deductible in the current year. The excess carries forward as part of the net operating loss (NOL) to future years. This limitation applies to losses from all of the taxpayer’s trades or businesses combined.
For most small businesses, this limitation does not apply unless the business has a single-year loss exceeding $305,000 (e.g., from a large Section 179 deduction on a major equipment purchase). Business owners with large Year 1 write-offs should be aware that the excess business loss limitation may defer part of the deduction to future years.
What is the difference between Section 179 and bonus depreciation?
Both allow accelerated cost recovery, but they work differently. Section 179 lets you deduct the full cost of qualifying assets in the year placed in service, up to an annual limit ($1,220,000 in 2024), but only against net business income (it cannot create a loss). Bonus depreciation (60% in 2024, phasing down 20% per year) applies to both new and used property with no dollar limit and can create a net operating loss. Section 179 requires an active election on the return. Bonus depreciation applies automatically unless you elect out. For most small businesses, Section 179 is preferred when income supports the deduction. Bonus depreciation is better when you want to generate or increase a loss for carryforward.
What is bonus depreciation and how has it changed recently?
Bonus depreciation allows you to deduct a large percentage of an asset’s cost in the first year, rather than spreading it over the full MACRS recovery period. Under the Tax Cuts and Jobs Act, bonus depreciation was 100% for assets placed in service from September 27, 2017 through December 31, 2022. It began phasing down by 20% per year: 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and 0% in 2027. Unlike Section 179, bonus depreciation can create or increase a net operating loss, which you can then carry forward to offset future income. Bonus depreciation applies to new and used property (the TCJA removed the new-only requirement), as long as you have not previously used the asset.
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Yarik Yarosh, CPA. "Tax Loss Harvesting for Business Owners: Selling Depreciated Assets and Recognizing Business Losses." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-tax-loss-harvesting-business-assets
This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.