Can I Deduct an LLC Investment?

Deducting Investment Loss

• The IRS treats your ownership interest in the LLC business as a capital asset. As a result, the loss you incur on the sale of your interest, which you calculate as the sales price minus your investment, is useful to eliminate capital gains on other assets you sell during the year and in future years. However, each tax year that you are unable to use the entire loss to offset other capital gains, the IRS allows you to deduct up to $3,000 of the loss from the other ordinary income you report on a 1040 form.
  
  

Sole Proprietor Deductions

• When you are the only owner of the LLC, the IRS designates it as a sole proprietorship, which requires you to report all LLC income and deductions on a Schedule C attachment to your personal tax return. This allows you to separately calculate the net profit of your LLC before adding it to your gross income. This net profit is equal to the gross earnings of the LLC less all deductible business expenses you incur. No limit is set on the type or amount of expenses you can deduct on Schedule C; the only requirement is that each expense be ordinary and necessary for the type of business you operate and that it not include any portion of your investment. For example, if you operate a real estate agency as an LLC, ordinary and necessary expenses can include office rent, telephone service, vehicle expenses, employee salaries and many others.
  
  

Partnership Deductions

• If more than one LLC owner exists, the IRS designates the LLC as a partnership. The rules covering the deductions you can claim are the same as those that apply to sole proprietorships. However, you report the LLC earnings and deductions differently. A partnership must prepare an informational return on Form 1065 that reports all LLC earnings and deductions, but the business doesn’t make the tax payment. Instead, the partnership must allocate a percentage of the LLC’s earnings and deductions to each LLC owner on a Schedule K-1 in proportion to their ownership interest. You then report the K-1 information on a Schedule C or E attachment to your personal tax return and pay the income tax on your share of the LLC’s net taxable earnings.
  
  

Corporate Implications

• When you choose to treat the LLC as a corporation, no deductions can be claimed on your personal tax return since the LLC is now a separate taxpayer from its owners. The LLC will report all earnings and expenses on Form 1120 and is responsible for making income tax payments. As an LLC owner, this has no effect to your personal return.