A limited liability company (LLC) can show a loss for unlimited years. However, the Internal Revenue Service (IRS) has limitations. The IRS allows claiming losses for three out of five tax years. After that, the IRS can disallow claimed losses.
LLC Formation and Operations
An LLC forms when members sign an agreement. This adopts the LLC. New LLCs may not have started operating yet. Or older LLCs may have become inactive without formal dissolution. Then they can have a year with no business activity.
Tax Benefits and Deductions
LLCs provide asset protection for owners. They still have partnership or sole proprietorship flexibility. For taxes, LLCs can be sole proprietorships, partnerships, or corporations. LLC owners may deduct business expenses. And they may deduct business losses. These deductions reduce taxable income. They likely lower self-employment tax costs too.
If an LLC operates as a single-member LLC, a multi-member LLC not a corporation, or an S corporation LLC, it can report losses against personal income. But claiming losses year after year has risks. The IRS can initiate an audit. Owners must prove the business is legitimate and records justify deductions taken.
Loss Deductibility Limits and Carryovers
- Married taxpayers filing jointly may deduct no over $500,000 a year in total losses.
- Individual taxpayers may deduct no more than $250,000.
You determine a business loss for the year by listing income and expenses on IRS Schedule C. If costs exceed income, you have a deductible loss. This deducts against other income on Form 1040.
Before 2017, businesses could carry losses forward 20 years without limits. After the Tax Cuts and Jobs Act, net operating losses carry forward indefinitely until fully recovered. But they limit to 80 percent of taxable income per tax period.