Tax Loss Harvesting for Business Owners: Selling Depreciated Assets and Recognizing Business Losses

Business asset loss strategies:

1. 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).

2. 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).

3. 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.

4. 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.

5. 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).