When Can Inventor Claim Net Operating Loss?

Dear Rich: My co-inventor and I have a partnership and we've spent a few thousand dollars working on an invention. Can we deduct our losses from the partnership's income tax return, or do we do it individually on our separate returns? First, let's address the animated GIF issue. As we have indicated previously, we're caught up in something that's apparently difficult to control. We know the effect cheapens our blog and makes it seem as if we are now accepting banner ads from car insurance companies (which, hey, we're not against doing if the numbers worked out). But these days when we reach in our mailbag, our overriding criteria for choosing a question is whether it lends itself to a GIF. And our holy grail is to find a question that we can answer solely with an animated GIF. Stay tuned!
Right, you had a question. We're not tax experts but we do know enough about taxes to tell you that a partnership's return is "informational" and that a partnership is a "pass-through" entity, which means that the profits and losses pass through the partnership to the individual owners. Whether the partners can deduct a net operating loss (NOL) depends on your ability to show the IRS that your inventing activities are a business, not a hobby, that you  keep accurate records of your expenses, and that you have a legitimate legal basis for your deductions. Assuming you can do that, you may be able to use your NOL deduction either going forward (in future tax years) or apply it against past returns. There's more on NOLs in this IRS booklet and we've also got an article explicitly on the subject of  NOLs and inventors.