How can I take advantage of business losses in my unincorporated business?
You can definitely take advantages of these losses incurred in your business that is unincorporated. The IRS will as a matter of fact allow you to deduct these losses provided you were actively participating in this business.
Where do you report these losses?
The business activity will be reported on your 1040 Individual Tax Return on Schedule C. The net loss generated from this business however, will flow to your Form 1040 page 1.
What is the Impact of these losses?
Your spouses W-2 income of $45,000 will be reduced by the Schedule C losses of approximately $23,000. Thereby resulting in your AGI of about $22,000 which will be further reduced by your itemized deductions or $10,700 of standard deduction if you do not itemize and a further deduction is allowed for personal exemption of $6,800 ($3,400 per dependent).
Thus, it would appear that you would end with taxable income as low as $4,500, possibly resulting in a federal tax liability as low as $450 due to being in the 10% income bracket.