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J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line by Barbara Weltman

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Limitations on Business Losses

Once you figure whether your business has sustained operating losses, you must then determine the extent to which you can deduct these losses. A number of limits apply that restrict full and immediate write-offs of business losses. For example, the hobby loss rules may limit deductions from certain business activities, as explained in Chapter 26. Not all of the rules that follow apply to all types of businesses, so only review those rules applicable to your company.

Basis

If you own a pass-through entity, business losses claimed on your personal return cannot exceed your tax basis in the company. Losses in excess of basis can be carried forward and used in future years to the extent of basis at that time. There is no time limit on these carryforwards.

PARTNERSHIPS AND LLCS

Basis is determined, in part, by the way in which a partner or member acquires his interest in the entity.

  • If the interest is acquired by contributing directly to the entity (typically in the start-up of the business), then basis is the cash and owner’s basis of the property contributed to the entity.
  • If the interest is purchased from an owner (for example, a retiring partner), then basis is the cash and value of the property paid.
  • If the interest is acquired by performing services for the business, then basis is the amount of compensation reported. However, the receipt of an interest in the profits of the business (and not a capital interest) is not taxable under certain conditions ...

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