ACCA Advanced Taxation (ATX) Practice Exam

Can losses from an unincorporated business be offset against total income?

1. Yes, in all cases

2. No, never

3. Yes, with specified limits

4. Only for certain types of income

The correct answer is: Yes, with specified limits

Losses from an unincorporated business can indeed be offset against total income, but there are specified limits and conditions under which this is allowed. This means that while taxpayers have the ability to utilize losses to reduce their overall taxable income, the extent of this offset may not be unlimited. In many jurisdictions, there are rules in place to ensure that losses are applied correctly and to prevent abuse of tax benefits. These rules may include restrictions on the types of income that can be offset by business losses, time limitations on when losses can be claimed, or thresholds that define how much can be deducted in a given tax year. For instance, if a taxpayer has multiple sources of income, they may only offset a portion of their business losses against certain types of income, such as earned income, while other income types, like investment income, may not qualify for such offsets under specific provisions of the tax law. The idea of having limits ensures that taxpayers cannot generate excessive losses simply to lower their tax liability significantly across multiple income sources indiscriminately. Therefore, understanding these conditions and limits is crucial for tax planning and compliance related to offsetting business losses.