Tax Court Ruling Benefits Entrepreneurs and Those Involved in Multiple Ventures

Entrepreneurs won a key battle against the IRS when the Tax Court recently decided that investors in LLC and LLP structured companies can now deduct losses in these businesses against salaries and investment income.  Previously the tax code only allowed these losses to be written off once a company was either profitable or sold.  Now for instance, someone who is involved in multiple ventures, or employed full-time while invested part-time in a limited partnership or limited liability corporation, can offset their losses against other salary or investment income.

The ruling specifically applies to LLC and LLP structured companies which are the preferred business structures adopted by startups because they offer the liability protection of a corporation without double taxation.

The IRS has long fought this scenario and believes losses in such ventures should be considered passive until a company becomes profitable or is sold.  This typically takes many years to occur – if it happens at all. 

The IRS could still appeal the ruling. Or, it may opt for assessing greater self-employment taxes on LLP and LLC income, thus making the ruling not so favorable for those limited liability companies who are succeeding in generating personal income for their ownership.

For more details, see the story in The Wall Street Journal.