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Income Tax Losses: Claiming LLC Losses on Your Individual Tax Return

Income Tax Losses: Claiming LLC Losses on Your Individual Tax Return

No one really plans for business losses. However, it is essential that you not only recognize but also plan for these occurrences in your LLC to help keep your business stable. This is why it is so important to create not only a profit-sharing provision in the operating agreement, but also to create a loss-sharing provision. 

There is some good news for limited liability companies – they will enjoy the same tax advantages offered to sole proprietorships, as well as partnerships – pass-through taxation. However, they also receive the same protection offered to corporations. As an LLC owner, you have the ability to claim the LLC’s losses on your own, individual income tax return, which allows them to help and offset the other types of income or profit you may have. 

Understanding Pass-Through Taxation 

When you hear the term, “pass through taxation” it indicates a situation where the losses and the revenues of the LLC will “pass through” be dispersed to the members of the LLC. Instead of having to file a corporate income tax return for company revenue, and an individual tax return for the disbursed profits (which is referred to as corporate double taxation) LLC members file a single return and pay their taxes just one time. While this option is extremely valuable for the LLCs that are making a profit, it will also be beneficial for those who are facing losses and having to file income tax losses. 

What You Can Do with the LLC Business Losses 

Any profit loss that is derived from your LLC needs to be claimed on your individualized tax return. IN most cases, you will be using an IRS Form 1040, as profit or loss from businesses have to be declared on the Schedule C. The business losses you have incurred will then offset any income, from any source, including wages paid from a different job, profit disbursements coming from the LLC, and even independent contractor or investment income. 

What are You Allowed to Claim as a Deduction? 

According to the tax code, all of the losses from the LLC are able to be claimed and included on the individual income tax returns. However, the proportion of the business loss has to be equivalent to the fair proportion that was outlined in the operating agreement of the LLC. If you are the only member or owner of the LLC, then you will have the ability to deduct the entirety of the loss. However, if you have an LLC with more than one owner or member, then each person has to determine their proportion and then deduct the proper income tax losses according to this. 

Keep in mind, the proportion will be independent to a members’ financial contribution. For example, the LLC’s operating agreement may state that while Person 1 invested $1,000,000 and Person 2 invested $5,000, the profits and looses that are shared by both Person 1 and Person 2 will be divided equally. 

If there is no statement in the operating agreement regarding how the losses will be shared, then the courts will make the assumption that the members of the LLC had the intention to share the losses the exact same way they dictated they would share the profits. For example, if you co-own your LLC with two more individuals, and you all agree to share the profits equally, then you will be allowed to deduct one-third of the total operating losses of the LLC on your personal tax return. 

Handling LLC Losses and Your Income Tax Losses 

There is no doubt that it can be quite disappointing to have to report income tax losses and to see red and negative numbers on the balance sheet for your LLC; however, the losses can provide you with a benefit when it is time to do your taxes. Keep in mind, you have to recognize your business losses on your individual tax return or you are going to be missing out on often significant tax savings. 

If you are still confused about how to handle the losses in your LLC, then you should consider taking the time to find a tax preparer or a professional accountant. They will be able to help you with this and ensure you receive the tax breaks you deserve. 


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