Wisdom

A recent Tax Court decision has ruled that investors in LLC’s and LLP’s are not limited partners for passive activity loss limitation purposes, thereby allowing an offset of losses against certain other income. The IRS has long contended that losses incurred by LLCs and LLPs are not deductible by the member, as they are considered passive investors. The Tax Court ruled that the Treasury Regulations governing limited partnerships do not apply to members of an LLC or LLP and thus losses incurred are not limited. A similar ruling was also handed down in 2000 from a district court but it only applied to Oregon taxpayers. While this ruling is a positive step for entrepreneurs it may have some negative consequences for those profitable LLCs and LLPs whose members are hoping to avoid additional tax by claiming a passive investment. This is not the last step for this ruling and it’s expected the IRS will either appeal or have Congress clarify the regulations.