Do LLC Losses Pass Through to Your Personal Taxes?

Yes, LLC losses generally pass through to your personal taxes, but passing through is not the same as being deductible. Before a loss offsets your wages, investment income, or other earnings, it has to survive up to four separate IRS limitations applied in order: your basis in the LLC, the at-risk rules, the passive activity loss rules, and the excess business loss cap. Any dollar that fails a test is suspended, not lost, and usually carries forward until something changes. How the LLC is taxed also controls which form the loss travels on and, critically, how the entity’s debt factors in.

Where the Loss Shows Up on Your Return

A single-member LLC is a disregarded entity by default. You report the business directly on Schedule C, or Schedule E for rental activity, inside your Form 1040.¹

A multi-member LLC defaults to partnership taxation. The LLC files Form 1065 and issues each member a Schedule K-1, which carries the member’s share of income and loss to the personal return. The entity itself pays no tax.²

An LLC can also elect S corporation treatment by filing Form 2553. It then files Form 1120-S and issues K-1s to the owners. The mechanics look similar to a partnership, but the basis rules diverge sharply, which the next section explains.²

One classification breaks the pass-through model entirely. If the LLC elects C corporation treatment, losses stay at the entity level and never reach the owner’s personal return. The rest of this article assumes no C corporation election.

Limit 1: You Can’t Deduct More Than Your Basis

Basis is your running investment account with the LLC. It starts with the cash or property you put in, goes up when the LLC allocates income to you, and goes down when you take distributions or claim loss deductions. You cannot deduct losses that would push basis below zero.

For a partnership-taxed LLC, IRC Section 704(d) allows your share of partnership loss only to the extent of your adjusted basis at year-end.³ For an S corporation LLC, IRC Section 1366(d) limits deductible losses to the sum of your stock basis and the adjusted basis of any debt the S corporation owes directly to you.⁴ Losses that exceed basis are suspended and carry forward until you contribute more capital or the LLC’s future income rebuilds your basis.

Why Debt Treatment Splits Partnerships From S Corporations

In a partnership-taxed LLC, your share of the entity’s liabilities generally increases your basis. That includes non-recourse debt, where the lender can only pursue the collateral. This matters enormously in real estate, where a member can have substantial basis without putting much personal cash in.

S corporation rules are far stricter. Entity-level borrowing does not increase a shareholder’s basis at all. Only debt the S corporation owes directly to you counts. Guaranteeing the company’s bank loan is not enough on its own, because the regulations treat a guarantee as a potential future liability rather than the actual economic outlay needed for debt basis. You generally need to actually make payments on the guaranteed debt before your basis moves.⁵ This single difference causes many S corporation owners to hit the basis wall on losses the same business would deduct if taxed as a partnership.

Limit 2: The At-Risk Rules

Losses that survive the basis cap next face IRC Section 465. Your at-risk amount measures how much you could actually lose if the business failed. It usually starts at the same place as basis and then strips out amounts where you are shielded from real economic exposure, like non-recourse debt or guarantees from related parties.⁶

Because non-recourse financing is excluded, the at-risk amount is almost always smaller than basis in a leveraged partnership. Losses above your at-risk amount are suspended until you increase your economic exposure, for example by converting a non-recourse loan into a recourse one, or by earning activity income that rebuilds your stake.

The Real Estate Exception

Qualified nonrecourse financing secured by real property counts toward your at-risk amount even though no one is personally on the hook. The financing has to come from a bank or other qualified person, or from a government entity, and it cannot be convertible debt.⁶ This carveout is why real estate investors can typically take large losses on leveraged properties under the at-risk test without being personally liable on the mortgage.

Limit 3: The Passive Activity Loss Rules

For most LLC owners with a day job, this is the filter that actually stops the loss. Under IRC Section 469, losses from a passive activity can only offset income from other passive activities. They cannot reduce wages, salary, or portfolio income like dividends and interest.⁷

An activity is passive unless you materially participate. The IRS lists seven tests, and you only have to meet one. The most common is working more than 500 hours in the activity during the year.⁸ Others cover situations where your work is substantially all of the work done in the activity, or where you participated materially in five of the last ten years. An LLC member who writes a check and lets someone else run the business will typically fail every test, making every dollar of loss passive.

The $25,000 Rental Real Estate Allowance

Rental activities are passive by definition, no matter how many hours you put in, with one narrow exception. If you actively participate in a rental real estate activity and your modified adjusted gross income is under $100,000, you can deduct up to $25,000 of rental losses against non-passive income. Active participation is a lower bar than material participation; approving tenants, setting rent, and authorizing repairs generally qualifies.⁷

The $25,000 phases out by 50 cents for every dollar of modified AGI above $100,000, and disappears entirely at $150,000. Higher earners get nothing from this exception.

Real Estate Professional Status

A more powerful escape exists if you qualify as a real estate professional. You need more than 750 hours during the year in real property businesses where you materially participate, and those hours must be more than half of all personal services you perform across every occupation. Clear both and your rental real estate activities become non-passive, with losses deductible against any income and no dollar cap.⁷ The time requirements effectively rule out anyone with a full-time job outside real estate.

Limit 4: The Excess Business Loss Cap

Even losses that clear the first three limits face one more. IRC Section 461(l) prevents individuals from deducting business losses above a threshold in a single year. For 2025, the threshold is $313,000 for single filers and $626,000 for joint filers, adjusted annually for inflation.⁹

The calculation nets income and loss across all your business activities. Anything above the threshold is disallowed for the year and becomes a net operating loss carryforward, deductible later under the NOL rules.¹⁰ The cap mostly affects owners of large businesses or those with heavy depreciation, but it applies to every pass-through owner. The provision is scheduled to remain in effect through the end of 2028.¹¹

What Happens to the Losses That Get Blocked

Losses suspended by any of the four limits do not disappear. Each limit keeps its own bucket of suspended losses, and the buckets carry forward indefinitely until the conditions change. The order matters. A basis-suspended loss freed up by a capital contribution may then run into the at-risk test, and anything that clears at-risk may still hit the passive activity rules. A single capital contribution can cascade through multiple layers and release losses that have been frozen for years.

Selling the Activity

The strongest release valve is disposing of your entire interest in a passive activity in a fully taxable sale. All previously suspended passive losses tied to that specific activity are freed and become non-passive, usable against any income including wages and portfolio returns.⁷ A partial sale does not do it. You must dispose of the entire interest.

Death of the Owner

Suspended passive losses are allowed on the deceased owner’s final return, but only to the extent they exceed the step-up in basis the heir receives. If the property’s basis steps up by $80,000 and the owner had $100,000 in suspended losses, only $20,000 is deductible on the final return. If the step-up equals or exceeds the suspended losses, nothing is deductible.⁷

Gifting the Interest

Gifting works differently. Suspended passive losses do not transfer to the recipient and do not become deductible by the donor. Instead, the suspended loss amount is added to the basis of the gifted interest immediately before the transfer, so the recipient benefits indirectly through a smaller taxable gain when they eventually sell.¹² Gifting an interest with large suspended losses means those losses will never produce a direct deduction for anyone.

Side Effects on QBI and Self-Employment Tax

A deductible LLC loss reaches two other calculations most owners overlook. The first is the Section 199A qualified business income deduction. A loss reduces your QBI, and if net QBI across all your businesses goes negative, the loss carries forward and shrinks the QBI deduction available in future profitable years.¹³ A loss year does not just wipe out this year’s deduction; it eats into next year’s too.

The second is self-employment tax. If the LLC is taxed as a sole proprietorship or partnership and you are actively involved, your share of net earnings is subject to SE tax once it exceeds $400. A net loss produces no net earnings, so no SE tax is owed on the activity for the year.¹⁴ Losses do not generate a negative SE tax or refund earlier years’ payments. They just zero out the current year’s obligation.

1
Internal Revenue Service. Single Member Limited Liability Companies
2
Internal Revenue Service. LLC Filing as a Corporation or Partnership
3
Office of the Law Revision Counsel. 26 USC 704 – Partners Distributive Share
4
Office of the Law Revision Counsel. 26 USC 1366 – Pass-thru of Items to Shareholders
5
The Tax Adviser. Loan Guarantee Does Not Increase S Corp Shareholders Debt Basis
6
Office of the Law Revision Counsel. 26 USC 465 – Deductions Limited to Amount at Risk
7
Office of the Law Revision Counsel. 26 USC 469 – Passive Activity Losses and Credits Limited
8
Internal Revenue Service. Publication 925 (2025), Passive Activity and At-Risk Rules
9
Internal Revenue Service. Revenue Procedure 2024-40
10
Internal Revenue Service. Instructions for Form 461
11
Congress.gov. Expiring Provisions in the Tax Cuts and Jobs Act (TCJA, P.L. 115-97)
12
The Tax Adviser. Disposing of Passive Activities
13
Internal Revenue Service. Qualified Business Income Deduction
14
Internal Revenue Service. Topic No. 554, Self-Employment Tax