Running a limited liability company (LLC) involves not only generating income but also handling losses now and then. In some cases, it is possible to deduct losses incurred by the business, generally reporting a share of the operating loss on the member’s tax return.
In this article, you will discover the reasonable threshold of operating loss an LLC can claim when filing taxes with the IRS.
Limitations on LLC Loss Deductions – A Realistic Overview
While it is perfectly possible to deduct operating losses on an LLC, several factors determine whether some elements are deductible or not. The list of important factors includes the business’s legal structure, the percentage of investment in the company, and the associated risk to each member.
If the members of an LLC also have other household income, it will also be considered as part of the assessment. Ultimately, deducting a business loss might be more complicated than most entrepreneurs think.
Here’s a list of the limitations applied to LLC loss deductions:
Excess Loss
Generally, a business loss can be a useful tool to reduce the taxable income of an LLC member. The Tax Cuts and Jobs Act of 2017 limited the amount of deduction on personal returns on up to $250,000 of business losses on individual returns or $500,000 on jointly-filed returns.
Any amount exceeding this statutory threshold may not be deducted, exposing LLC members to taxation.
At-Risk Investment
LLCs can elect to be taxed as S-Corps or Partnerships. In these two types of business structures, the deduction threshold depends on how much each member has “at risk” in the business. In many LLCs, some members often have more at-risk than others.
The percentage of investment at risk often affects the percentage of deduction available for each member. Please note that this factor does not apply to single-member LLCs for logical reasons.
Involvement in the Business
Multi-member LLCs often have fluctuating levels of involvement in the business’s daily activities, with some members being more actively involved than others. Members who do not actively engage in the business on a regular or substantial basis may not be able to deduct business losses on their tax returns.
Ultimately, if a member of an LLC is not actively engaged in the company to guarantee it generates profit, it is not possible to use operating losses to reduce personal tax liability.
Is it Possible to Carry Over Losses on an LLC?
The main option to deduct business losses on personal returns for LLC members is to file personal tax returns, but there is also the alternative to carry the operating losses forward to tax years yet to come.
LLC members who opt for this alternative can count the operating losses from the current year as an “expense” carried over to the next year’s tax obligations. Please note that the amount to be carried forward cannot surpass an 80% threshold of the total taxable income.
Do You Need an Optimized Tax Strategy for Your Limited Liability Company? – Immediately Contact an Expert CPA
Waste no time with uncertainty. Contact Edward D. Quilca, CPA today by calling (786) 310-5582 or emailing [email protected] to find the best tax-saving strategy for your LLC.
