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Limitations on Deductibility of LLC Member’s Share of Losses

Published by Jon Morgan | Co-Founder & Chief Editor

Last updated: September 30, 2026

FACT CHECKED by Jon Tobin, Business Attorney

Methodology
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An LLC can report a business loss without each owner being entitled to deduct that amount on a current tax return. The result depends first on the LLC's federal tax classification and the kind of loss it passed through.

For an LLC taxed as a partnership, a Schedule K-1 (Form 1065) shows a member's share of tax items, but it does not decide whether that loss is deductible this year [1]. Each member must apply the limits that fit their basis, risk, participation, and tax facts.

Start by identifying the K-1 item, then apply the relevant rules in order. Keep the LLC's tax loss separate from the amount an owner may claim on an individual return.

Quick Summary

An LLC's federal tax classification determines which loss rules apply; an LLC's name alone does not establish a deduction.
For partnership losses, apply outside-basis limits first, followed by at-risk, passive-activity, and excess-business-loss rules when they apply.
A Schedule K-1 reports tax items but does not prove the full amount is currently deductible; outside basis is not the K-1 capital account.
Track every disallowed amount under the specific rule that suspended it because carryforward rules differ.
For tax year 2025, the excess-business-loss threshold is $313,000 ($626,000 for joint filers); check the threshold for the year you file.

The Basis Limit: Start Here

For a partnership-taxed LLC, a member generally may deduct a distributive share of loss only up to adjusted outside basis after the required tax-year adjustments. Contributions, income, distributions, losses, and the member's share of partnership liabilities can affect basis; a K-1 tax-basis capital-account balance is not the same as outside basis, so it alone does not establish the deductible amount [2].

The partner is responsible for tracking outside basis and should keep a year-by-year worksheet. Do not assume that cash contributed equals the amount of loss currently deductible.

First confirm what an LLC is and review how LLC tax treatment works. Our guide to pass-through taxation explains how partnership items can reach owners.

Identify the Type of Loss

Start with the exact type of K-1 item: ordinary business loss, rental loss, capital loss, or a separately stated deduction. These items can follow different reporting rules and tax limits, so a member should not treat every amount as one general “LLC loss” [3].

Review the K-1 box and any attached statement to see what the partnership reported and what information the member needs. If the item or activity is unclear, ask the partnership or tax preparer before entering it on the return.

How LLC Tax Classification Affects Losses

A domestic single-member LLC is generally disregarded for federal income tax unless it elects corporate treatment; a domestic LLC with two or more members generally defaults to partnership status [4]. These are federal defaults, and an eligible LLC may elect a different classification. The IRS explains the options in its IRS LLC tax-classification overview.

A partnership-taxed LLC generally files Form 1065 and gives each member a Schedule K-1 (Form 1065) reporting that member's share of tax items. Each member separately checks the limits that apply to their own return.

An LLC taxed as an S corporation follows shareholder stock-and-debt basis limits before other applicable rules; see the IRS page for Form 7203 [5]. An LLC taxed as a C corporation generally uses a separate corporate return, so its operating loss does not pass directly to members [6].

Example: Apply the Limits in Order

Suppose a partnership member has $18,000 of outside basis available for loss after the required adjustments, and the K-1 reports a $30,000 loss. Up to $18,000 clears the basis step; the remaining $12,000 is basis-suspended and may be used in a later year when basis is available, subject to the other limits.

The $18,000 is not automatically deductible: the member must next apply any at-risk, passive-activity, and excess-business-loss limits that fit the activity and tax facts. A later rule can suspend some of the amount that passed the basis test.

This example leaves out liabilities, separately stated items, loss-specific rules, elections, and participation facts that can change the result. Use the member's actual records and the instructions for the tax year involved.

The LLC's tax loss and the amount a member may deduct for the year can differ. A valid entity-level loss may be partly or fully suspended by an owner-level limit.

Apply the four partnership loss limits in this order:

Basis: A partner generally deducts a partnership loss only to the extent of adjusted outside basis. A basis-suspended loss may carry forward until basis is available, subject to later limits.
At risk: The partner generally may deduct only the amount for which they are economically at risk under the applicable rules. Use Form 6198 when required to calculate this limit.
Passive activity: A passive loss is generally limited under passive-activity rules, with exceptions and special rules based on the activity and member's participation. Form 8582 is used where applicable [7].
Excess business loss: After earlier limits, a noncorporate taxpayer may have an additional annual limit. For 2025, the threshold is $313,000 ($626,000 for a joint return); an excess disallowed loss is treated as an NOL carryforward, and 2025 law made the disallowance permanent. Use Form 461 when required [8].

Some K-1 items have additional deduction rules, so check the specific item and activity before treating these four limits as the complete test. The instructions for that item may require another calculation.

The threshold amount and filing instructions are tax-year specific. Do not apply the 2025 figure to another year; check the current filing-year instructions before filing.

When Can You Claim the Loss?

After the applicable limits, report allowed items on the return and schedule that fit the LLC's federal tax classification and activity. A Schedule K-1 reports partnership tax items, but it does not decide whether the member can deduct each amount this year.

Keep the K-1, outside-basis worksheet, contribution and distribution records, liability information, and prior-year suspended-loss schedules. The operating agreement and partnership statements can help explain allocations, but they do not replace the member's own tax-basis records.

When a loss is suspended, record which rule caused it and the tax year. Basis-suspended losses, passive losses, and NOLs have different carryforward and release rules; do not combine them into one generic balance.

When a suspended business loss becomes a net operating loss

An excess business loss under section 461 is generally disallowed for the current year and treated as an NOL carryforward under section 172. That does not mean every LLC tax loss automatically becomes an NOL.

For an individual, Form 172 helps figure and track an NOL; the carryback or carryforward treatment depends on the loss year and other facts. NOL carryforwards from years after 2017 generally face an 80%-of-taxable-income limit when used in a later year, subject to special rules [9]. A C-corporation-taxed LLC uses corporate loss rules, so a member cannot claim its operating loss as a personal pass-through deduction.

FAQs

Can You Deduct Losses From an LLC?

Sometimes. For a partnership-taxed LLC, a member applies outside-basis, at-risk, passive-activity, and excess-business-loss limits before claiming the allocated loss.

Do LLC Losses Carry Forward?

Often, but the rule depends on why the loss was disallowed. Basis-suspended partnership losses, passive losses, and excess business losses follow different carryforward rules.

Does a K-1 Capital Account Show My Outside Basis?

No. A partner’s tax-basis capital-account balance on Schedule K-1 is not the same as adjusted outside basis, which the partner must track separately.

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