Business Loss Limitations

If deduction for investment or business activity are more than the income it brings in, they will have a loss in that year.

How much loss can taxpayer deduct?

Pass through entity structure mainly avoid double taxation.

Pass through basis - only apply to pass through entities.

Basis is ones economic interest in an investment.

Contributions to the entity and debt generally create the basis for a pass through entities.

Basis becomes essential when passed through entity generates a loss as the owner, basis will determine the deductibility of the loss by the owner.

Calculate for each owner increase and decrease the basis.

• Increase- in partnership, basis is considered by contribution of cash or property.

• Increase share of partnership liabilities.

• Recognition of income or gains, including non-taxable income.

• Decrease- the basis is decreased by distributions of cash or property.

• Reduce share of partnership liabilities.

• Recognition of losses or deductions, including non-deductible expenses.