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Using a Business Loss to Offset a Conversion (2026)

Updated July 28, 2026. Quick answer: A business loss produces ordinary deductions that need income to absorb. A conversion produces exactly that. Pairing them deliberately can move money into a Roth at a very low or even zero effective rate.

Two halves that fit

A loss year is usually treated as bad news, and a conversion year as expensive. Together they can cancel: the loss absorbs the conversion income, and the converted balance grows tax-free thereafter.

This is one of the few genuinely large planning opportunities that arrives disguised as a problem, and it is routinely missed because nobody is thinking about tax strategy in a year the business lost money.

The interaction is technical: loss limitation rules, basis, at-risk and passive activity rules, and carryforward mechanics all bear on how much of the loss is actually usable this year. This page flags the opportunity; sizing it is a preparer’s job, and the sizing is where the value is.

Get the order right

The conversion has to happen in the same tax year as the usable loss. A loss recognised in December and a conversion in January are two separate years and the match is gone — which makes this a decision that has to be made before year end, not at filing.

Sources

IRC §408A (Roth IRAs); IRC §408A(d)(3); IRC §402(c)(11) (inherited plan amounts); IRC §170 (charitable deduction); IRC §172 (net operating losses); SECURE Act (2019) and final RMD regulations published 19 July 2024. Cross-checked July 2026 against professional analyses. Indexed thresholds, aid formulas and state Medicaid rules are described rather than asserted — they change annually and by state.

This states what the cited authority says. It is not tax advice.

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