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Originally Posted by jahh  Reply: Our company is an LLC not a S corp.You said I can take the loss but does this mean I can choose not to. Can't I save the loss for future years-don't need a NOL. We are in a gray area for participation-spend less than 500 hours but some of the areas we are the only partners that do some things(examples-cost analysis/work ratios). The LLC is in a different state. One partner runs the operation-2 partners just put up the capitol and give some direction. In reading Publication 524 it sound like some of our significant participation could be considered Passive activity and therefore held until we have passive gain. |
Reply: Our company is an LLC not a S corp.------> LLC that you designate as a partnership for tax purposes must provide the IRS with an informational tax return on Form 1065 and a Sch K-1 attachment for each LLC member. An LLC structure limits the owners' liability for the LLC's actions and debts, much like a corporation, but provides the pass-through taxation benefits of a partnership.
You said I can take the loss but does this mean I can choose not to. ====>> An NOL is treated as used in a year to which it can be carried, even if you did not take the deduction. The NOL is deemed absorbed based on the correct taxable income, which reduces the NOL available in later years.OK let me put this way.In general when a sole owner, an owner of SMLLC, NOT MMLLC, files sch C, then he/she takes NOL as when you have negative number on Sch C line 29 / 31 then you can claim it on your 1040 line 12 as negative business income;however as a member of LLC( I mean you do not file Sch C for your LLC) you need to also utilize your NOL; NOLs are deductible losses that derive from participation in a trade or business. When you generate an NOL, you need to report your share of loss reported on your Sch K1 of 1065 on your 1040 line 17 and you may amend your returns from the past two years for NOL carry back and apply the losses against prior-year income (you may deduct the NOL in the carry back years if it is to your tax advantage to do so. If the NOL is not completely absorbed in the prior years, carry over the unused NOL to future years). So, alternatively, if you foresee being in a higher tax bracket in the subsequent year, you could elect to carry the entire NOL forward. This would decrease the taxable income, which would decrease what you owed in taxes. The other alternative is to waive carrying back the NOL and carrying it forward and applying it toward the next 20 years of income. As most LLCs are treated as partnerships, these entities cannot claim NOLs. Instead, the member, like you, can use the income and losses to calculate NOLs for your personal return. The amount of losses you can claim on your personal return depends on your basis in the LLC, or the amount of after-tax investment you have made in the business. This amount is calculated as all investment amounts that you provide the LLC, plus any prior year income from the LLC, minus any distributions to you and any prior-year losses from the LLC. Any losses in excess of a member’s basis cannot be claimed on a personal return in that year. So to speak, since your share of the business’s losses are passed through the business to your individual return and deducted from your other personal income in the same way as a sole proprietor.
Can't I save the loss for future years-don't need a NOL. We are in a gray area for participation-spend less than 500 hours but some of the areas we are the only partners that do some things(examples-cost analysis/work ratios). The LLC is in a different state. One partner runs the operation-2 partners just put up the capitol and give some direction. In reading Publication 524 it sound like some of our significant participation could be considered Passive activity and therefore held until we have passive gain.=====>> As mentioned above;in general businesses can carry back and carry forward the NOL. Generally, if you have an NOL for a tax year ending in 2014, you must carry back the entire amount of the NOL to the 2 tax years(2012/2013) before the NOL year , and then carry forward any remaining NOL for up to 20 years after the NOL year . You can, however, choose not to carry back an NOL and only carry it forward. However, business structure has a big impact on your ability to deduct NOLs. as your company is a pass-through entity ,LLC, losses are passed through to the partners as said above, and deducted on your individual tax returns. It’s then determined at the individual taxpayer level whether or not an NOL is generated.
Here’s where it gets complicated: Individual owners of pass-through entities can deduct business losses only to the extent of their adjusted tax basis, which isn’t necessarily the same as the balance in their capital accounts. Also, losses may be limited further by the at-risk and passive loss rules. The rules apply differently depending on the type of entity. Consider basis, for example. Generally, the initial basis of pass-through entity owners is the amount they pay to acquire their interests plus the adjusted basis of any property they contribute to the company. During the life of the business, basis may be increased by the owners’ shares of company income, subsequent capital contributions and other factors. Basis may also be reduced (though not below zero) by the share of distributions, taxable losses and other items.One advantage of the partnership structure is that partners, under certain circumstances, can deduct losses in excess of their investment in the company. That’s because their tax basis is increased by certain partnership debt. An LLC member’s basis is also increased by business debt, but the at-risk rules make it difficult for members to deduct losses beyond their company investment. Because LLC members enjoy limited liability for company obligation, the portion of their basis attributable to company debt generally isn’t considered to be “at risk” unless they pledge nonbusiness property as collateral or otherwise assume personal liability for the debt. There’s also an exception for “qualified nonrecourse financing” — loans secured by real estate used in the business and meeting certain other requirements.The ability of pass-through owners to deduct losses may also be limited by passive loss rules. These rules provide that owners can’t deduct passive business losses against nonpassive income such as wages, interest, dividends and capital gains. For business losses to be considered nonpassive, an owner must materially participate in the business. Disallowed passive losses may be carried forward and offset against future passive income.The IRS allows owners to demonstrate material participation in several ways. Examples include working for the business for more than 500 hours a year or performing substantially all of the work in the business.
As your business is a pass-through entity and you anticipate an NOL this year, you should determine whether the basis, at-risk or passive loss rules will limit your ability to deduct company losses. If they will, there may be moves you can make to increase your deductions, such as making additional capital contributions, lending money to the company or increasing the number of hours you spend working in the business.
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