What Is an Ordinary Loss?

"Ordinary loss" in finances is a broad term that refers to any loss that does not result from capital assets. There can be many reasons for ordinary loss, such as a significant theft or inventory spoiling and becoming unsellable. When it comes to filing taxes, all ordinary loss can be written off, unlike capital loss, which has a write-off threshold. If these losses outweigh the gross income of a business or individual, then the affected business or person may not have to pay any taxes for that year.

There are two major types of losses: ordinary and capital. Unlike ordinary loss, which is broad, capital loss is a specific type of loss. When someone buys an asset, he usually has to pay for it. The asset normally will be sold for more money after it matures or if the value increases but, if the asset is sold for less, then the difference is considered a capital loss. These assets can be any sort of capital, including futures and bonds.

If the loss is not capital, then it is considered an ordinary loss, and there can be many reasons for this to occur. For example, if a food store’s produce rots and cannot be sold, this is considered a loss, because money was spent but there was no profit from the expenditure. Other causes for this loss include theft, damage, recalls and a long list of other possibilities. As long as money is lost and it does not originate from a capital source, the losses are considered ordinary.

Aside from their sources, there is another major difference between ordinary and capital loss. In most countries and regions, capital loss has a threshold; anything above this threshold cannot be written off and is treated as gross income. With ordinary loss, there is no threshold, so everything can be written off to decrease taxes. For this reason, and because assets may be able to increase in value in the future, most people prefer ordinary losses.

Another benefit to ordinary loss is that, if it is too much, then the business or individual may not have to pay any taxes. There is no threshold to this type of loss, so it can outweigh gross income for a taxpayer who loses a substantial amount of money during a year or quarter. In this case, because there technically is no gross income, the taxpayer will not have to pay any taxes, which can help in such devastating scenarios.