An LLC (Limited Liability Company) can show a loss for as many years as the business operates at a loss, subject to certain limitations and rules imposed by tax laws.
Here are some key points to consider regarding LLC losses…
Pass-Through Entity – By default, LLCs are treated as pass-through entities for tax purposes. This means that the profits and losses of the LLC “pass through” to the individual members’ tax returns. The LLC itself does not pay taxes; instead, the members report their share of the LLC’s income or losses on their personal tax returns.
At-Risk Rules – The IRS has “at-risk” rules that limit the amount of loss an LLC member can claim on their tax return. Generally, an LLC member’s deductible loss is limited to the amount they have at risk in the business. This limitation prevents LLC members from using losses to offset income from other sources beyond their investment in the LLC.
Passive Activity Loss Rules – The IRS also has passive activity loss rules that limit the ability to deduct losses from passive activities (activities in which the taxpayer does not materially participate). Many LLCs, especially rental real estate LLCs, fall under the passive activity category. However, there are exceptions and special rules that may allow LLC members to deduct passive losses.
Material Participation – If an LLC member actively participates in the business operations, they may be able to deduct losses from the LLC against other income. To be considered materially participating, an LLC member typically needs to meet certain criteria set by the IRS, such as participating in the business for a certain number of hours per year.
Basis Limitations – LLC members’ ability to deduct losses may also be limited by their basis in the LLC. Basis refers to the member’s investment in the LLC, including contributions made and their share of profits or losses. Losses cannot exceed an LLC member’s basis in the LLC.
Carryforward of Losses – If an LLC incurs a net operating loss (NOL) in a tax year, the LLC or its members may be able to carry forward the NOL to offset income in future tax years. The rules for NOL carryforwards vary depending on the tax status of the LLC and other factors.
While an LLC can show a loss for multiple years, the ability of its members to deduct those losses on their tax returns depends on various factors, including their at-risk amount, passive activity status, material participation, and basis limitations. It’s essential for LLC members to consult with tax professionals to understand how tax rules apply to their specific situation.