Can LLC Losses Be Carried Over? The Truth for Business Owners + FAQs

Many small businesses start out with losses, especially in the first few years. The good news is that U.S. tax laws often let you carry over these LLC losses to lower your taxes in future years. In this article, we break down how loss carryovers work for single-member and multi-member LLCs. We’ll explain how these losses impact your personal taxes, give simple examples (with tables) of common scenarios, compare key differences, and point out mistakes to avoid. Finally, we answer frequently asked questions from online forums in a quick Q&A format. All information is kept simple (under a 9th-grade reading level) with short, easy-to-read sections. Let’s dive in!

Key Terms and Concepts 📖

LLC (Limited Liability Company): A business structure where owners (“members”) usually aren’t personally liable for business debts. For tax purposes, an LLC is typically a pass-through entity, meaning its profits or losses “pass through” to the owners’ personal tax returns. An LLC can have one owner (single-member) or multiple owners (multi-member). By default:

• A single-member LLC is taxed like a sole proprietorship (disregarded entity). The owner reports business income and loss on their personal return.
• A multi-member LLC is taxed like a partnership. The business files a partnership return and issues K-1 forms to each member for their share of profit or loss.

(Note: LLCs can also elect to be taxed as an S corporation or C corporation. S corps still pass through income to owners, while C corps are separate taxable entities.)

Loss Carryover (Carryforward): A tax rule that lets you use a business loss in a future year if you can’t use it all in the current year. In other words, if your LLC’s deductions exceed its income (a loss) and you can’t fully deduct it this year, you carry the leftover loss into future tax years. This can reduce taxable income in those future years.

Net Operating Loss (NOL): When your overall tax return shows a negative taxable income due to business losses, you have a net operating loss. For example, if your LLC had a $50,000 loss and you had no other income, you’d have a $50,000 NOL. Under current law, you generally carry forward an NOL to future years – you can no longer carry it backward to past years in most cases. Carrying forward an NOL lets you offset future taxable income until it’s used up.

Passive Loss: A loss from business activities in which you do not materially participate, or from rental activities. Passive losses (like losses from a rental property LLC or a business you don’t help run) usually can only offset passive income – they can’t normally reduce other active income like wages. If you have passive losses with no passive income to use them against, the losses are suspended and carried forward to future years. They become usable once you have passive income or when you sell/exit the activity entirely (at that point, any suspended losses become deductible).

At-Risk (Basis) Limitation: You can only deduct losses up to the amount you have at risk or invested (basis) in the business. For example, if you invested $5,000 into a multi-member LLC, you can’t deduct losses beyond that $5,000 unless you invest more or the business earns additional income. Any loss beyond your basis is suspended (carried over) until you increase your basis. This rule prevents owners from deducting more than their economic investment.

Excess Business Loss (EBL): A tax-law limitation (in effect for 2018–2025) that caps the amount of business losses an individual can use to offset non-business income in a year. In 2023, the cap is $289,000 (or $578,000 for a joint return) – this threshold is adjusted for inflation. If your total losses from all businesses exceed your total business income by more than this amount, the excess can’t be deducted in the current year. Instead, the excess loss is carried forward as an NOL to the next year. (This rule applies after applying the at-risk and passive loss rules.)

How LLC Losses Affect Your Personal Taxes 🧮

Single-Member LLCs: If you are the only owner, the IRS treats the LLC like it doesn’t exist for tax purposes (unless you elect corporate tax status). You report the LLC’s income and expenses on Schedule C (for business) or Schedule E (for rental) attached to your Form 1040. A loss from a single-member LLC directly reduces your total taxable income on your personal return. For example, a Schedule C loss can offset other income you have, like wages from a job. If the loss is bigger than all your other income, you end up with a net operating loss and carry it forward to future years.

Multi-Member LLCs: If the LLC has multiple owners (and is not taxed as a corporation), it must file a Partnership return (Form 1065). The LLC doesn’t pay tax itself; instead, it issues each member a K-1 showing their share of the LLC’s profit or loss. You report the K-1 loss on your personal return (Schedule E). This loss can offset your other income only if you have sufficient basis (investment) in the LLC. In practical terms, basis is often the money you put in or left in the company. If your share of the loss is greater than your basis, the extra part of the loss is suspended and carried forward (you can deduct it in a later year when your basis increases). Assuming you do have enough basis, a multi-member LLC loss will reduce your total taxable income just like a single-member’s would. If the loss is large enough to exceed all your other income (and not limited by other rules), it can create an NOL to carry forward.

LLC Taxed as S Corp: An LLC can elect to be taxed as an S corporation. It still passes income/loss to owners on K-1s (like a partnership). Owners can deduct losses on their personal return if they have basis in their stock or loans to the company, similar to the partnership basis rule. S corp losses are subject to the same passive loss and excess loss rules at the individual level.

LLC Taxed as C Corp: If an LLC elects C corporation taxation (or is by default a C corp in rare cases), it becomes a separate taxpayer. The loss stays with the corporation – it does not flow through to the owners’ personal returns. The C corp can carry its loss forward to offset its own future profits (corporate NOL), but the owners cannot deduct that loss on their personal taxes.

Why Claiming Losses Matters for Your Taxes

When you can deduct an LLC loss on your personal return, it reduces your taxable income. You pay tax on a smaller amount of income, which can mean a lower tax bill. For example, if your LLC loss is $10,000 and you have $50,000 of other income, your taxable income might drop from $50,000 to $40,000 because of the loss. This often results in real tax savings. If the loss is big enough to wipe out all your income (or is limited by rules), you don’t lose the benefit – you just carry the remaining loss to future years.

Below we’ll walk through a few common scenarios to show how LLC loss carryovers work in real life.

Simple Examples: LLC Loss Carryover Scenarios 🎓

Let’s illustrate three typical scenarios where LLC losses are carried over. These examples use small numbers to keep things simple. Each scenario includes a table to show how losses are applied year-to-year and what gets carried forward.

Scenario 1: New Single-Member LLC with a Net Operating Loss

Jenny started a single-member LLC in 2022. She had no other income that year. Her business brought in $0 revenue and $15,000 of expenses (a startup can easily spend more than it earns). This gives Jenny a $15,000 loss in 2022. Since she has no other income to offset, the entire $15,000 becomes a net operating loss (NOL) on her personal tax return.

She carries this loss forward to 2023. In 2023, her business earns $10,000 of profit. Thanks to the carried NOL, Jenny can offset that $10,000 profit completely, paying no tax on it. After using $10,000 of the NOL, the remaining $5,000 of loss carries into 2024.

In 2024, suppose the business earns $20,000. Jenny still has a $5,000 NOL carryover left, which she uses to reduce her 2024 taxable business income to $15,000. At that point, the NOL is fully used up.

How it works: Jenny’s NOL carryforward lets her apply the 2022 loss against profits in 2023 and 2024, reducing taxable income in those years. Current tax law allows NOLs from LLCs (and other pass-throughs) to be carried forward indefinitely until used up. However, NOLs generally can only offset up to 80% of taxable income in a given future year (an additional limitation not shown here to keep the example simple).

Scenario 2: Multi-Member LLC with Passive Loss (Rental Property)

ABC LLC is a rental property venture with two equal partners. In 2023, the LLC has a $10,000 loss (rental income was low and expenses high). Each partner gets a K-1 showing a $5,000 loss. Neither partner has other passive income (and rental losses are considered passive by default). According to passive activity loss rules, a passive loss can only offset passive income. This means the $5,000 loss per partner is suspended (not deducted in 2023) and carried forward as a passive loss carryover.

In 2024, suppose the rental market improves and the LLC generates $6,000 profit. Each partner now has $3,000 of passive income (their share). They can use the carried-forward passive loss from 2023 to offset this passive income. Of the $5,000 passive loss carryover each had, $3,000 is used to offset the 2024 passive income fully, leaving $2,000 of loss carryover for each partner.

In 2025, the partners decide to sell the rental property and close the LLC. When a passive activity is completely disposed of, any remaining suspended passive losses become fully deductible in that year. So in 2025, each partner can finally deduct the $2,000 passive loss that was still carried over, even if they have no passive income that year.

How it works: Passive losses from an LLC don’t vanish if you can’t use them right away – they carry over to future years. In this example, the partners’ rental losses waited until there was passive income (2024) or the activity ended (2025) to be deducted. This ensures that eventually the partners get a tax benefit from the losses, just not until the proper time. (Note: There is a special tax exception allowing up to $25,000 of rental loss to offset non-passive income for active managers of rental property, subject to income limits – but we didn’t use that rule here.)

Scenario 3: Multi-Member LLC Loss Limited by Owner’s Basis (Investment)

XYZ LLC has two 50/50 owners. Each invested $5,000 into the business. In the first year, XYZ LLC has a rough start and ends up with a $16,000 loss. Each owner is allocated half the loss, which is $8,000 per person. However, an owner cannot deduct more than their basis (amount invested and at risk) in the company. Since each owner’s basis is $5,000, that’s the most loss each can use right now.

• Each owner deducts $5,000 of the loss on their personal return (reducing their other income).
• The remaining $3,000 per owner is suspended due to the basis limitation. This $3,000 becomes a carryover for each owner to use in future years when their basis increases.

In year two, imagine each owner puts an extra $3,000 into the LLC (maybe as additional capital or loans). This raises each owner’s basis, allowing them to finally deduct the $3,000 carryover loss from the prior year. If the LLC breaks even in year two (no new loss or profit), the only deduction each owner claims in year two is that $3,000 previously carried. After using the carryover, no loss remains suspended.

How it works: In a partnership or S-corp LLC, owners can only deduct losses to the extent of their investment or loans to the business. In this scenario, each owner had to carry forward $3,000 of their Year 1 loss because they didn’t have enough at stake in the company. Once they put in more money the next year, they were able to use those carried losses. The logic is that you shouldn’t get a tax deduction for money you never actually put at risk. If losses exceed your basis, they aren’t lost – they’re deferred. You carry them over year to year until you have enough basis to take them (for example, by investing more or when the business earns profits that increase your basis).

These scenarios show that LLC losses can offset future income and are subject to important limitations. In the next section, we’ll summarize the tax rules and limitations that govern these outcomes, with evidence from tax resources.

How the Tax Rules Handle LLC Losses (Evidence) 📑

Tax law provides several layers of rules on deducting business losses. Here’s a breakdown of the key rules that determine if an LLC loss is deductible now or carried forward:

• Pass-Through Deduction of Losses: If your LLC is a pass-through (sole proprietorship, partnership, or S-corp), you generally can deduct the business loss on your personal return. This is true for most LLCs apart from those taxed as C corps. A single-owner LLC’s Schedule C loss can offset other income on your return. For multi-owner LLCs and S-corps, you can also claim the loss personally if you have sufficient basis in your ownership interest. In short, LLC losses “flow through” to owners, with some restrictions.

• Net Operating Loss Carryforward: When your allowed losses exceed your total income, you have a net operating loss. Current law allows NOLs to be carried forward indefinitely until used up. Prior to 2018, you could also carry back NOLs to prior years for a refund, but now carrybacks are mostly disallowed (except for special cases). An NOL from a pass-through business is claimed on your personal Form 1040. For example, if your LLC loss in 2023 creates a negative overall income, that loss will be available to deduct in 2024 and beyond as an NOL carryforward. (Note: When using an NOL carryforward in a future year, you can typically offset up to 80% of that year’s taxable income with the NOL.)

• Passive Activity Loss (PAL) Rules: The IRS classifies income and losses as either active (from businesses you materially participate in or from working) or passive (from rental activities or businesses you don’t actively run). Passive losses can only be used to offset passive income – you generally cannot use a passive loss to reduce your salary or other active income. If you don’t have enough passive income in the year, the passive loss is suspended. It carries forward to the next year, where the same rule applies. The loss keeps carrying over until either you have passive income to absorb it or you dispose of the activity. When you sell or fully dispose of a passive activity, any suspended losses from that activity become fully deductible against any income in that year. This rule is a relief provision so that you can ultimately use the losses when you exit the investment.

• At-Risk and Basis Limitations: Before you can deduct a loss, you must actually have money at risk in the venture. In partnerships (including multi-member LLCs) and S-corps, the tax law says a loss deduction is allowed only up to your basis in the entity. Basis generally includes the cash and property you’ve contributed, plus your share of any business debt you are personally liable for. Any part of the loss above that amount is disallowed and carried forward to future years. You’ll get to deduct those suspended losses in a later year when your basis increases (for instance, if you contribute more capital, or the business has profits that increase your ownership equity). This is known as the at-risk rule – you can’t deduct what you’re not at risk of losing. For example, if your basis is $0 because you invested nothing and only guaranteed no debts, you cannot deduct losses until you invest or loan funds to the LLC.

• Excess Business Loss (IRC §461(l)): On top of the above, the tax code temporarily (2018–2025) limits large aggregate losses for non-corporate taxpayers. In simple terms, if your total business losses for the year exceed your total business income by more than a certain threshold (for example, $250k for single filers or $500k for joint filers, adjusted yearly), you can’t deduct the excess amount in that year. The excess turns into an NOL carryforward to the next year. For instance, if you have $600k of business losses and $100k of business income as a joint-filing couple in 2023, you’ve exceeded the joint limit by $22k. That $22k is an excess business loss – you can’t deduct it in 2023, but you carry it forward as part of your NOL to 2024. This limitation is applied after passive and at-risk rules. So you apply those first; then if you still have a very large usable loss, the excess loss cap might kick in.

In summary, LLC losses first flow through to owners if possible. Then the passive loss, at-risk/basis, and excess loss rules act as filters:

1. If the loss is passive, it’s limited to passive income (carry forward unused).
2. If the loss exceeds your basis, the excess is suspended (carry forward).
3. If the allowable loss still exceeds the IRS’s annual threshold, the extra is treated as an NOL carryforward.

Whatever portion of the loss is allowed after these rules will reduce your current-year taxable income. Any disallowed portion is not gone forever – it’s carried over to future tax years.

We’ve used evidence from tax resources to confirm these rules. For example, the IRS explicitly states that excess business losses disallowed in the current year “are treated as a net operating loss carryover” to the next year. Tax advisors also note that if your losses are limited by the new law, “they carry over like an NOL.” Likewise, passive loss carryovers persist year-to-year until you can use them, and basis-limited losses carry forward on the LLC’s books until your basis increases.

Single-Member vs. Multi-Member LLCs: A Quick Comparison 🔍

Both single-member and multi-member LLCs enjoy pass-through loss deductions, but there are some differences in how those losses are applied and reported:

• Tax Filing: A single-member LLC reports losses on Schedule C or E of the owner’s personal return. A multi-member LLC files a Form 1065 partnership return and issues Schedule K-1s to owners who then report the loss on Schedule E.

• Offsetting Other Income: A single-member LLC’s loss directly offsets the owner’s other income (like wages, interest, etc.) on the 1040. A multi-member LLC’s loss also can offset the owner’s other income after passing through, provided the owner can take the loss (has enough basis and isn’t barred by passive rules). In both cases, a legitimate business loss can reduce overall taxable income on the personal return.

• Basis Tracking: In a single-member LLC (taxed as sole proprietorship), you generally don’t have to calculate a formal “outside basis” each year – you simply report the loss. In a multi-member LLC, basis tracking is critical. Each owner must keep track of their basis in the LLC because losses are limited to that basis. The LLC will usually provide an analysis of each partner’s capital account and basis. S corporation LLCs similarly require basis tracking for shareholders.

• Loss Limitations: Both single and multi-member LLC losses face the same tax law limitations at the owner level: passive loss limits and the excess business loss cap apply to all individual taxpayers. However, multi-member LLC owners often run into the basis/at-risk limitation more frequently, whereas a single-member sole proprietor is at risk for all business debts by default (unless non-recourse loans are involved). In practice, this means a partner in an LLC might be allocated a big loss but can’t use it due to basis—whereas a sole proprietor with the same numbers would get the deduction (and perhaps create an NOL).

• C Corporation Exception: If either type of LLC chooses C corporation taxation, the loss does not pass through to owners. Instead, the corporation itself carries the loss forward on its corporate tax return. This is not common for small LLCs, but it’s worth noting that the pass-through benefit is lost in that scenario – one reason many small businesses stick with default pass-through status.

Bottom line: For single-member and multi-member LLCs alike, the tax outcome of losses is similar – deduct the loss if you can, carry it over if you can’t. The main differences lie in the process (forms and basis calculations) rather than the ultimate benefit. Both structures allow you to eventually use genuine business losses to offset income, either now or in the future.

Common Mistakes to Avoid 🚫

Deducting LLC losses can get tricky. Here are some common mistakes and pitfalls to watch out for, and tips on how to avoid them:

• Assuming All Losses Are Immediately Deductible: Don’t forget the passive loss and at-risk rules. If your LLC is a passive activity (e.g. rental) or if you haven’t invested enough to cover the loss, you can’t deduct the full loss right away. It will carry forward, instead. Mistake to avoid: trying to write off a passive loss against salary or other active income. Solution: Track your passive losses and basis; understand that some losses are deferred, not denied.

• Not Tracking Suspended Losses: If you have carryover losses (NOLs, passive losses, or basis-limited losses), keep good records of them year to year. A common error is losing track of these carryforwards, which could lead to missed deductions later. Always carry them to your next year’s tax forms until used. For instance, if you had suspended passive losses from a prior year, make sure to release them when you sell that business or property – the year of disposal is when you can finally deduct them in full.

• Mixing Personal and Business Expenses: Only legitimate business expenses can create a deductible loss. If you accidentally try to deduct personal costs as part of your LLC’s loss, you could get in trouble. One Reddit commenter cautioned a business owner who wanted to claim expenses: “Were these legit business expenses? If they’re not clearly business rather than personal you’re at risk.” Always separate personal and business finances. If it’s not “ordinary and necessary” for your business, it shouldn’t go on your Schedule C or LLC books.

• Improperly Expensing Inventory or Capital Items: Certain costs, like inventory purchases or equipment, cannot be fully expensed immediately. They must be capitalized (and deducted when sold or over time). For example, inventory costs generally should be counted as an asset until the inventory is sold, not instantly written off as an expense. If you expense large inventory buys in one year, you might create a big loss that the IRS could disallow by saying you used the wrong accounting method. To avoid this, follow the tax rules for inventory (Cost of Goods Sold) and depreciation for assets. This ensures your loss deductions are valid.

• Ignoring the “Hobby Loss” Rule: The IRS expects that you’re trying to run a for-profit business. If you show losses year after year with no profit periods, the IRS might question whether your LLC is really a business or just a hobby. If classified as a hobby, losses are not deductible. A general guideline is to aim to have a profit in at least 3 out of 5 years (for horse farming, 2 out of 7 years) to presume a profit motive. Mistake: thinking you can indefinitely deduct losses with no profit in sight. Solution: Keep evidence of trying to make profit (business plan, marketing, separate accounts). If your activity is genuinely a business, you can defend your losses. But if it’s truly not-for-profit, don’t deduct those losses against other income.

• Not Having Sufficient Basis for Partnership Losses: If you’re a member of a multi-member LLC or S-Corp, be mindful of your basis. A mistake is taking the full loss when your basis doesn’t support it. For example, if you only invested $1,000 but were allocated an $5,000 loss, you can’t deduct all $5,000. Claiming it anyway could raise flags and will likely be corrected by the IRS or an audit. Always calculate your year-end basis. If the loss is more than your basis, report the correct allowed loss and carry over the rest. This often means communicating with your tax preparer or using the appropriate forms for at-risk limitations.

• Forgetting the New Loss Limit (Excess Business Loss): High-income entrepreneurs should remember the excess business loss cap. If you have very large losses, expect that amounts over the annual threshold will be disallowed in the current year and become an NOL. One tax forum commenter reminded taxpayers that under current law, “business losses are limited… If your losses are limited they carry over like an NOL.” The mistake would be assuming you can use a $1 million loss all at once against other income – in reality, part of it will carry forward. Plan for this in your tax projections.

• Not Filing the Right Forms: Ensure you file the correct tax forms for your LLC type. If you have a multi-member LLC, you must file Form 1065 and provide K-1s, even if you had a loss. Don’t make the mistake of thinking “no income, no tax filing needed.” Similarly, if you dissolved the LLC, still file a final return. The act of reporting losses on your individual return remains the same – you just need to have the documentation (K-1, etc.). Failing to file required returns can mess up your ability to claim the losses.

By steering clear of these mistakes, you can maximize the tax benefit of your LLC’s losses and avoid headaches with the IRS. When in doubt, consult a tax professional, especially if you have large or complex losses. A CPA can help ensure you’re applying carryovers correctly and meeting all requirements – which is well worth it when you’re dealing with big dollars.

FAQ: Frequently Asked Questions 🤔

Finally, let’s answer some common questions people ask on forums like Reddit about LLC losses and carryovers. Each answer is brief for quick reading:

• Q: Can my LLC losses offset my W-2 income?
  A: Yes. If your LLC is a pass-through (sole proprietorship or partnership), its losses can offset your other income (like W-2 wages) on your tax return.

• Q: How long can I carry forward an LLC loss?
  A: Indefinitely, until it’s used up. Current law allows unlimited carryforward of net operating losses. Unused passive or basis-limited losses also carry over until you can deduct them.

• Q: Do I have to claim my LLC’s loss on my personal return?
  A: Yes. If it’s a pass-through LLC, you must include the K-1 or Schedule C results on your Form 1040. You can’t skip it – report the loss even if it’s suspended.

• Q: What if I don’t have enough income to use the loss this year?
  A: Then you’ll have an NOL or suspended loss to carry forward. The loss isn’t wasted – you’ll apply it against income in future tax years.

• Q: My LLC closed – can I still use the carryover losses?
  A: Yes. Dissolving the LLC doesn’t erase your losses. You can carry forward any remaining losses to your future returns. If it was passive, disposal actually frees up those losses to deduct.

• Q: Will multiple years of LLC losses trigger an audit?
  A: Yes or no. Consistent losses can draw IRS attention, but if you have proper records and a profit motive, you’re allowed to deduct legitimate losses.

• Q: Can I carry back my LLC losses to prior years for a refund?
  A: No. For most new losses, you can only carry them forward. (There are exceptions for certain years and farm losses, but most businesses now use carryforward only.)

• Q: If my LLC is taxed as a C Corp, can I deduct the loss personally?
  A: No. Losses from a C-corp LLC stay at the corporate level. Only the corporation can carry them to future years – the owners can’t deduct those losses on personal returns.

• Q: I only invested a little in my LLC but it lost a lot. What happens?
  A: Yes. You can deduct up to the amount you put in (and any loans you’re responsible for). The rest of the loss is suspended until you invest more or the business earns profit.

• Q: Do I need a CPA to handle loss carryovers?
  A: Yes, it’s wise—especially for big losses. A tax professional can ensure you apply all limits and carryovers correctly. Mistakes with losses can be costly, so expert help is recommended for complex situations.