USA Income/loss from two separate businesses

[res321]

A taxpayer has two forms of incomes from separate businesses.

One is sole proprietorship and the other a LLC with the taxpayer being the sole member/owner. The LLC’s sole purpose was to invest in a project. The taxpayer made substantial income from sole proprietorship but lost a substantial sum through LLC, as the project failed and all the invested sums were completely lost.

Can the income that generated from sole proprietorship which is how the taxpayer makes his living be offset against massive losses in the LLC, whose sole member/owner is the taxpayer?

 

[ArcSine]

You'll need to classify the loss generated by the LLC / project as either • ordinary; • passive; or • capital.

To the extent that it's properly classified as ordinary, it'll offset the sole prop net income dollar for dollar on the taxpayer's individual return.

Passive and capital losses are limited in their deductibility against the sole prop income; generally, there will be a carryforward to future years of any such losses that exceed the limits for any given year.

Both passive and capital losses can generally be used to offset dollar for dollar income of the same nature; for example, if the taxpayer has passive income from some other source(s), then passive losses from the LLC / project could net out fully against that passive income. Similarly, capital losses can offset fully against capital gains.

But deducting passive or capital losses against ordinary income runs up against severe limitations, as mentioned, with the undeducted portion being carried forward for future deductions, subject to the same limitations.