Limited Business Losses
Posted by Tax Man - 06/02/12 at 05:02 amBusiness losses are never good. Most business entity owners desire a profit. But in the case of a loss, it may not always be tax deductible.
Often times consumers invest in mutual funds. The mutual fund manager may invest these funds in a business. C corps invested in do not affect the owner since they file and pay their own taxes. But an s corp and partnership owner pays taxes for the company as part of their personal return. Regardless of the type of company, you are an investor. As such, all your losses will be characterized as passive. This characterization refers to the fact you have no say in the business entity’s management. Such losses may offset other investment income totally, but are limited to $3000 a year against active income.
Active income is earned income, such as earned W-2 income or any type of company income earned for which you personally run or manage. Any c corp losses still do not affect you personally. The c corp will take these losses on the company tax return. But a sole prop, s corp or partnership you manage does affect your tax return personally. If you have a large loss in one of these companies you manage, it is 100% deductible against any other passive income you incur.
The only exception may be if you did not put any money into the company as an investment or as an owner. You generally may not take any passive or active loss that exceeds the amount you put into the company. That is the bad news. The good news is that you may take the losses later when you invest more into the company or as it makes a profit. The losses stay in a suspended state until such time as you put more into the company. If not before, the losses may be taken at the time of your death.
