How much of my losses due to investments in a LLC can I deduct?

Question

In 2013 I invested $90k for a 20% interest in a LLC and am a material participant. The LLC reported losses of $340k in 2013 and $180k in 2014. My losses were $68k in 2013 and $36k in 2014.

How much of these losses can I deduct?

Answer 1

You have to take the K1 and look closely at it.

Losses that are passive losses cannot be deducted in excess of the passive losses limitations. They are not offsetting other income, only passive income from the same activity.

Active losses are offsetting active income from other activities.

Capital losses are only offsetting capital gains and can only be deducted up to 3k limit.

There's also the matter of your basis in the partnership, and there may be more than one basis.

Without knowing exactly what your K1 states it is impossible to answer. You should talk to a licensed tax adviser (EA/CPA licensed in your state).

Answer 2

Usually you may only claim losses up to the amount of your cost basis. But cost basis in an LLC can get tricky.

according to this guy...

Your basis (tax cost) in an LLC includes:

1) Your contributions of cash and property

2) Your share of LLC profits not distributed to you

3) Your share of the LLCs debts to others. (In an LLC, loans to the company can increase your tax basis if you are personally liable for them. In an S corporation, only your direct loans to the company can increase your tax basis.)

...

So if the LLC acquired debt which you are liable for, that could increase your basis and therefore increase the amount you could claim as a loss.

Our accountant delivers a shareholder basis report along with K-1's for each LLC member. We operate under the impression that those shareholder basis reports are the responsibility of the LLC to maintain, but that may not be the case for all LLCs.