Made a loss in your freelance business? How the IRS, HMRC and the CRA let you use it (US, UK, Canada)

A slow first year or a quiet stretch between clients can leave your business expenses higher than your business income. That loss isn't wasted: each tax agency has rules for setting it against other income or against profits in other years. Here's what the IRS, HMRC and the CRA say, and the limits to know about before you claim.

General information, not tax or legal advice. Not written or reviewed by a lawyer or an accountant. The short answer, the side-by-side summary, the steps, the checklist, the wording to copy and all the other wording are ours; the official items come from the US, UK and Canadian government pages linked below. This page is for a self-employed person working on their own (a sole proprietor or sole trader). It doesn't cover companies, partnerships, LLCs taxed as partnerships or corporations, farming or fishing losses, capital losses, rental losses, US states, Quebec or other countries. It says nothing about whether a loss-making business is worth carrying on. Official pages were read on 2026-10-18.

The short answer

1. In the US, a Schedule C loss goes in with your other income on your return. If your deductions are more than your income for the year, you may have a net operating loss (NOL), which you now generally carry forward to later years rather than back.
2. In the UK, you can claim to set a trading loss against your other income of the loss year or the year before, or carry it forward against later profits of the same trade. Special claims cover the first years of trading and the final year.
3. In Canada, a business loss first reduces your other income for the year. What's left can be a non-capital loss you carry back up to three years or forward up to twenty.
4. Limits apply in all three countries, and the activity has to be a real business, not a hobby.
5. Keep a running record of each loss, what you've used and what's left.
6. Ask an adviser before you choose how to use a loss.

On this page

• 1. United States: the IRS
• 2. United Kingdom: HMRC
• 3. Canada: the CRA
• 4. Side by side
• 5. Self-employment tax, National Insurance and CPP
• 6. Step by step
• 7. Wording to copy
• 8. Loss checklist
• Free tools and kits
• Where the sources differ
• When to get advice
• Related
• Sources

1. United States: the IRS

• The loss on Schedule C: "If your expenses (including the expenses you report on line 30) are more than your gross income, don’t enter your loss on line 31 until you have applied the at-risk rules and the passive activity loss rules." "Enter your net profit or loss on line 31 and include it on Schedule 1 (Form 1040), line 3." (IRS: Instructions for Schedule C (Form 1040) (2025), page date 30-Apr-2026). The rest of the form is in Schedule C for US freelancers.
• At-risk and passive activity rules: "The at-risk rules generally limit the amount of loss (including loss on the disposition of assets) you can claim to the amount you could actually lose in the business." "In general, a business activity in which you do not materially participate or a rental activity is a passive activity and you have to use Form 8582 to apply a limitation that may reduce the loss, if any, that you may enter on Schedule C, line 31." Our reading: they matter most if you didn't work in the business much, or if some of the money in it isn't really at risk for you; check the instructions if either might apply.
• Net operating loss: "If your deductions for the year are more than your income for the year, you may have a net operating loss. An NOL year is the year in which an NOL occurs. You can use an NOL by deducting it from your income in another year or years." "A loss from operating a business is the most common reason for an NOL." (IRS: Instructions for Form 172 (12/2024), page date 30-Apr-2026).
• What's left out when you work it out: "In general, the following items are not allowed when figuring an NOL."
  • Capital losses in excess of capital gains.
  • The section 1202 exclusion of the gain from the sale or exchange of qualified small business stock.
  • Nonbusiness deductions in excess of nonbusiness income.
  • The NOL deduction.
  • The section 199A deduction for qualified business income.
• Back or forward: "Generally, you can only carry NOLs arising in tax years after 2020 to a later year. An exception applies to certain farming losses, which may be carried back 2 years." "Start by carrying the NOL to the first tax year after the NOL year. If you do not use it up, carry the unused part to the next year. Continue to carry any unused part of the NOL forward until the NOL is used up."
• A yearly cap: "The total amount of any NOL deduction for 2021 or thereafter that is attributable to NOLs from tax years after 2017 can’t exceed 80% of taxable income without regard to the NOL deduction or sections 199A or 250."
• Claiming it: "If you carry forward your NOL to a tax year after the NOL year, list your NOL deduction as a negative figure on Schedule 1 (Form 1040) for the year to which the NOL is carried." "Attach a Form 172 for each NOL to your Form 1040 or Form 1041 if it applies."
• Very large losses: "Noncorporate taxpayers may be subject to excess business loss limitations." "If you enter a loss on line 31, you may have an excess business loss. Use Form 461 to figure your excess business loss." "However, the excess business loss is treated as a net operating loss (NOL) carryover for subsequent years." "For 2025, the threshold amount is $313,000 ($626,000 for taxpayers filing a joint return)." "P. L. 119-21, commonly known as the One Big Beautiful Bill Act (OBBBA), permanently extended the disallowance of a deduction for excess business losses." (IRS: Instructions for Form 461 (2025), page date 30-Apr-2026).
• A real business: "You don’t need to actually make a profit to be in a trade or business as long as you have a profit motive." The IRS hobby rules are in hobby or business?
• Records: "You should keep records for any tax year that generates an NOL for 3 years after you have used the carryback/carryforward or 3 years after the carryforward expires."
• Publication 536 is retired: "Publication 536 will no longer be revised after tax year 2023. Instead, information for net operating losses is now included in the Instructions for Form 172." (IRS: Publication 536 will no longer be revised, page date 27-Jun-2026). Older articles that cite it may be out of date.

2. United Kingdom: HMRC

• When you have a loss: "If you’re self-employed or a member of a trading partnership you’ll usually make a loss when the trade expenses are more than the trade income." (HMRC helpsheet HS227: Losses, page date 2026-04-06). Working out the profit or loss on the return: see UK Self Assessment for freelancers.
• Ways to use it: "Trade losses may be used in a number of ways against:"
  • income or possibly against capital gains of the same year or an earlier year
  • profit of the same trade
  • income from a company to which you transferred your trade
• Against other income: "You may use the loss against your income of 2025 to 2026 or 2024 to 2025 or both years in any priority. Losses can only be used once." "Partial claims are not allowed so you must use all the loss or relieve as much of the income as possible in a tax year before allocating any remaining balance to other years or claims." "If you use the loss against earlier year’s income or capital gains you must also tell us the:"
  • amount of loss used for each year in the ‘Any other information’ box on the return
  • decrease in tax due for earlier years
• In the first years of trading: "You can make this claim for losses made in the first 4 years of trade. Start by reducing the 2022 to 2023 income."
• Time limit: the helpsheet says "The time limit for making these claims for 2025 to 2026 losses is 31 January 2027." See Where the sources differ before you rely on that date.
• When you can't claim against other income: "Do not make any of these claims if:"
  • you do not run your trade either commercially or for profit, for example if your trade is run as a hobby
  • you are a farmer or market gardener and you also made a loss (worked out for this purpose only before capital allowances are taken into account) in each of the previous five tax years
  • the trade is carried on wholly outside the UK and you make a claim under the FIG regime for the year of the loss
  "The amount of loss relief you claim against income or capital gains may be restricted or limited for example if you:"
  • worked for less than 10 hours a week on average on commercial activities of the trade
  • are a Limited Partner or a member of a Limited Liability Partnership
  • have a trade which is carried on wholly overseas
  • have claimed certain capital allowances
  • have income from oil extraction activities or oil rights
  "There’s a limit on the total amount of Income Tax reliefs that you may claim for deduction from total income for a tax year. Loss relief is one of the reliefs affected. The limit is the higher of £50,000 and 25% of the adjusted total income of the year." "The restrictions and limits do not apply to losses offset against profits of the same trade."
• Carrying it forward: "You can carry forward your loss, or the unused part of the loss, and any unused losses from earlier years to use against:"
  • profits of the trade in later years
  • income from a company that you transferred your trade to, wholly or mainly in exchange for shares in the company (pre-incorporation loss relief)
  Claims made outside the return can include one made "after the time limit for amending the tax return has expired, for example a claim to carry losses forward may be made up to 4 years after the end of the year of loss".
• In the final year: "You can claim relief for losses in the final 12 months of the trade, against profits in the trade in 2025 to 2026, and in the 3 prior years." More on stopping in closing your freelance business.
• How to claim: "Normally you’ll make your claim to loss relief in your tax return or amended return." "If you wish to make a stand-alone claim you must write a letter telling us your name, address and Unique Taxpayer Reference (UTR) also:"
  • the name of your trade
  • how much the loss is and for what period
  • how you want to use the loss
  A template is in Wording to copy below.
• Keeping track: "Use the working sheet to keep track of your losses and make sure you do not forget to claim relief for any of them." "Note that the total losses to be set against income, profit or capital gains for a year cannot exceed the income profit or capital gains of that year." The working sheet is on the HS227 publication page (page date 2026-04-06).
• Making Tax Digital: "If you need to use Making Tax Digital for Income Tax, you should read this helpsheet together with the guidance on how to use Making Tax Digital for Income Tax."

3. Canada: the CRA

• Reporting the loss: "If you have a loss, show the amount in brackets." (CRA: Self-employment income lines, page date 2026-01-20). The business statement itself: see Form T2125 for Canadian freelancers.
• Non-capital loss: "You may have incurred a loss in 2025 from a business other than farming or fishing. If this loss is more than your other income for the year, you may have a non-capital loss." "You can carry back your non-capital loss up to 3 years. Non-capital losses incurred after 2005 can be carried forward up to 20 years." (CRA: Guide T4002, chapter on losses, page date 2026-04-16). "Generally, a non-capital loss for a particular year includes any loss incurred from:"
  • employment
  • property
  • a business
  (CRA: Line 25200 – Non-capital losses of other years, page date 2026-02-05).
• Carrying it back: "To carry a non-capital loss back to 2024, 2023, or 2022, complete Form T1A, Request for Loss Carryback, and include it with your 2025 income tax and benefit return (or send it separately)." "Do not file an amended return for the year to which you apply the loss." The form page describes it as a "Form to ask for the application of a loss from the current year, to any of the three previous years." (CRA: Form T1A, Request for Loss Carryback, page date 2026-01-20).
• Carrying it forward: "You can reduce your taxable income by deducting any unapplied non-capital losses from previous years on line 25200 of your 2025 income tax and benefit return." "You can carry a non-capital loss forward for up to 20 years (unless it’s from an ABIL)".
• Finding your losses: "Your available losses are usually shown on your notice of assessment or notice of reassessment for the previous years." "You can view carry-over amounts using My Account or Represent a Client."
• A real business: the CRA's test for whether a business exists is in hobby or business?

4. Side by side

Our summary of sections one to three, not official wording.

5. Self-employment tax, National Insurance and CPP

A loss affects the contributions you pay on self-employment profit too, under separate rules. We cover them in our guides to US self-employment tax, UK National Insurance for the self-employed and CPP for the self-employed in Canada. The loss rules on this page are about income tax.

6. Step by step

Our order of steps, based on sections one to three — not an official checklist.

1. Finish your books for the year first: every invoice, every payment received and every business expense, in the currency you report in.
2. Work out the profit or loss on the self-employment part of your return the normal way.
3. If it is a loss, check that the work is a business and not a hobby, because all three agencies need a real business for most loss relief.
4. In the US, apply the at-risk and passive activity rules before you enter the loss, and check whether an excess business loss applies.
5. Decide how to use the loss where you have a choice: against other income now, an earlier year, or later profits. Ask an adviser before you choose.
6. Make the claim in the place each agency asks for: the return, an amended return, a loss form, or a letter.
7. Write down the loss, how much you used and in which year, and what is left to carry forward.
8. Each year, use the oldest losses first where the rules say so, and update your record.
9. Keep the records for the loss year until well after the last of the loss has been used.

If you find a loss you didn't claim on a return you already filed, see amending a filed tax return (in Canada, the CRA says to use the carryback form, not an amended return, to carry a loss back). Keeping your expense records complete: see freelance expense tracking.

7. Wording to copy

Replace everything in [brackets]. This is ours, not from any agency, and it's not legal or tax advice.

A loss record for your files

Business loss record (for my files)
Business: [your business name or trade]
Loss year: [tax year or fiscal period], loss of [amount] [currency code]
How it was worked out: [return, schedule or form], filed on [date]
Claim made: [same year / carried back / carried forward], on [return / amended return / form / letter], dated [date]
Used so far: [amount] in [tax year], [amount] in [tax year]
Left to carry forward: [amount] [currency code]
Use by (if there is a limit): [date or tax year]
Records kept until: [date], stored at [location]

A stand-alone loss claim letter to HMRC (UK)

Built from the items HMRC's helpsheet lists for a letter. Most claims go on the tax return instead; check the helpsheet and HMRC's current postal address before you send one.

Subject: Stand-alone claim for trade loss relief

[your full name]
[your address]
Unique Taxpayer Reference (UTR): [your UTR]

Name of my trade: [trade name or description]
Amount of the loss: [amount], for the period [start date] to [end date]
How I want to use the loss: [for example: set against my general income of the loss year, or carried forward against later profits of the same trade]

[anything else HMRC asked for, or that applies to you]

[your name]
[date]

8. Loss checklist

Our summary of the official pages above, not an official checklist.

• Your invoices, payments received and expenses for the loss year
• The self-employment pages or schedule showing the loss
• Any loss form or working sheet you filled in
• Which claim you made, for which year, and the date you made it
• A running record of how much loss is used and left, year by year
• Notices from the IRS, HMRC or the CRA that mention the loss
• A note of when each loss runs out, if it can
• A note of how long to keep each year’s records

Free tools and kits

• Our free expense and receipt log runs in your browser; nothing you type is sent or saved. It doesn't work out a loss or file anything.
• Our paid Freelance Billing Kit by Small Rows (US$12, one-time) keeps the income and cost records a loss is worked out from: the Invoices tab lists each invoice's number, client, issue date, amount paid and paid date, and the Expenses tab logs each cost with yearly totals by category. It doesn't work out taxable profit or a loss, apply the loss rules, keep track of losses carried back or forward, make a claim or file anything.
• All three kits together: the All-Kits Bundle by Small Rows (US$24, one-time).

Where the sources differ

• Carrying back: the IRS now generally allows carrying forward only (farming losses aside); the CRA allows up to three years back; HMRC allows one year back against other income, with longer carry-backs only under the early-years and final-year claims.
• UK time limit: the HS227 helpsheet for the latest year gives the same date as the previous year's helpsheet did, which said "The time limit for making these claims for 2024 to 2025 losses is 31 January 2027." (HMRC helpsheet HS227, previous year, page date 2026-04-06). The law says: "The claim must be made on or before the first anniversary of the normal self-assessment filing date for the loss-making year." (Income Tax Act 2007, section 64: Deduction of losses from general income, no page date shown). Our reading is that the newer helpsheet's date may not have been updated. Claiming by the earlier date is the safe course; check with HMRC or an adviser.
• CRA, older losses: the CRA line page says "You can carry a non-capital loss forward for up to 20 years (unless it’s from an ABIL)", but the same page also lists "You can reduce your taxable income by deducting:"
  • any unapplied non-capital losses you reported on your returns for the last 7 years
  • any unapplied farming or fishing losses for the last 10 years
  We couldn't reconcile the two on the pages we read. If your loss is several years old, check My Account or ask the CRA.
• IRS instructions date: the NOL instructions we read are the Instructions for Form 172 (12/2024), a revision older than the law change that the newer Instructions for Form 461 (2025) describe, and some of their wording about other deductions may be out of date. Check the IRS page for updates before you rely on them.
• What we did not check: US state rules; capital, rental, farming and fishing losses; the US alternative minimum tax; the passive activity and at-risk rules in detail; UK capital gains claims, partnerships, the FIG regime and Class Four National Insurance loss rules; HMRC's other helpsheets; Canada's allowable business investment losses, Quebec and provincial rules; companies; other countries.

When to get advice

• you're choosing between using a loss now, in an earlier year or in later years;
• your loss is large, or you borrowed money for the business;
• you've made losses several years in a row;
• you're in your first years of trading or your last, in the UK;
• you have farming, rental, investment or partnership income too;
• you're moving the business into a company, or you live in one country and work for clients in another.

Talk to an accountant or a tax adviser where you file. This page is general information only.

Related

• Schedule C for US freelancers
• UK Self Assessment for freelancers
• Form T2125 for Canadian freelancers
• Hobby or business?
• Closing your freelance business
• Sole trader vs limited company, LLC or corporation

Sources

• United States: IRS: Instructions for Form 172 (12/2024) (page date 30-Apr-2026) · IRS: Publication 536 will no longer be revised (page date 27-Jun-2026) · IRS: Instructions for Schedule C (Form 1040) (2025) (page date 30-Apr-2026) · IRS: Instructions for Form 461 (2025) (page date 30-Apr-2026)
• United Kingdom: HMRC helpsheet HS227: Losses (page date 2026-04-06) · HMRC helpsheet HS227: Losses, previous year (page date 2026-04-06) · GOV.UK: Relief for trading losses (HS227) and working sheet (page date 2026-04-06) · legislation.gov.uk: Income Tax Act 2007, section 64 (no page date shown)
• Canada: CRA: Line 25200 – Non-capital losses of other years (page date 2026-02-05) · CRA: Guide T4002, chapter on losses (page date 2026-04-16) · CRA: Self-employment income lines (page date 2026-01-20) · CRA: Form T1A, Request for Loss Carryback (page date 2026-01-20)

Checked 2026-10-18. Found a mistake? Tell us via Support.