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I know that LLCs have the benefit of pass-through taxation in the US and that any profits realized by the LLC are recorded as income by the LLC members, thus increasing their taxable income.

What is not clear to me is how losses affect the taxable income of the LLC members. Is there a limit to how much can be deducted for an LLC loss? If I made $60k at my day job, but an LLC I run alone on the side lost $60k, would I pay taxes on $0 of taxable income?

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The short answer is yes, losses get passed through to members. Limits/percentages do apply, primarily based on your share in the business.

Check out the final post in this thread:

http://community2.business.gov/t5/Other-Business-Issues/Paying-oneself-in-a-LLC/td-p/16060

It's not a bad little summary of the profit/loss pass-through.

Regarding your 60K/60K example: the amount of money you earn in your day job will impact how much loss you can claim. Unfortunately I can't find anything more recent at the IRS or business.gov, but see this from 2004 - 40K was the limit before the amount you could claim against started to be mitigated: http://en.allexperts.com/q/Tax-Law-Questions-932/tax-loss-pass.htm

HTH

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  • So if the top $50k of my income is in the 28% tax bracket and I lose $16k in my LLC, then my overall taxes would decrease by 28% of $16k = $4.4k.
    – Ryan Michela
    Commented Dec 8, 2010 at 8:07
  • Beyond the simple answer to your original question - Yes, losses pass through - it's difficult to respond accurately to anything more detailed. In both examples you list my immediate question is "what's your basis in the LLC?" and that's just for starters. On the face of it, in both instances, yes, the loss could pass through. But that's your starting point for working the issue, nothing more. Further details can be seen here: allbusiness.com/business-planning/…
    – gef05
    Commented Dec 8, 2010 at 12:13

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