LLCs with Passive Investors - Active vs. Passive Loss Limitations

If an LLC is formed with more than one member, the default tax treatment is a partnership for federal tax treatment.

The partnership does not pay taxes directly, as the profits and losses are passed through to the owners on Schedule K-1.

If a Schedule K-1 shows a business loss, the partner may be subject to the Passive Activity Loss (PAL) rules, which prohibit the individual to offset active income with passive losses.

Passive activity losses are reported on IRS Form 8582 and included with Form 1040.

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[danstephans]

Thanks for this. Taking the CFP in the future and this is helpful review.

[TheSeaOfAsher]

Would this apply to rentals set up in a LLC or do you have to different structures/rules for rentals? I been studying this and there is some who say you can file investors (that way you can write off loss) or do a pass through LLC. What I'm trying to infer is these apply to rentals too.

[JC-slammedaf]

Hello, i have a question i have bot been able to find an answer for. Me and my fiance have an llc taxed as an s corp. She is the only employee of the llc, i do not do anything, qnd therefore im not an employee. Lets say she is 70% share owner and im 30%. How does a non employee pay himself for his share ownership, just do a distribution? And if so, does that distribution go on k1 as passive income for me, since im not material ( employee) ? Thanks 🙏

[Isa-bella-]

Thank you for this video, personal service business, in year 1 to 3 of business would it be passive activity then?

[etf]

where do you document the participation as material? is it on document 8582?