An important new Tax Court case could provide valuable tax savings for owners of limited liability corporations (LLCs) and partners in limited liability partnerships (LLPs). 

The decision permits a couple to use a loss from an LLC or LLP to offset highly taxed income. Previously, it was presumed that such losses could only be used to offset income from other "passive" activities.

Background:  New forms of business ownership featuring limited liability are growing in popularity.  In particular, teh LLC setup is advantageous for it owners (called 'Members').  As with other pass-through entities, like S corporations and partnerships, items of income and loss of the business are passed through to the members where tax will be assessed on their family taxable income levels.  Therefore, there's only one level of tax as opposed to double taxation for C corporations.  

A passive activity is defined as a trade or business in which you do not "materially participate." The IRS has established several tests for determining material participation. But certain activities, such as rental real estate and limited partnership interests, are treated as passive activities right from the start.

In the new case, a couple's losses from several LLCs and LLPS were disallowed by the IRS. But the Tax Court disagreed with the IRS' presumption. Unlike a limited partner in a limited partnership, LLC and LLP owners do not compromise their limited liability under state law by participating in management. Therefore, the taxpayers should not automatically be treated as passive investors. If they qualify as material participants, they can deduct the losses against other income.

This new case may have particluar significance for many LLC and LLP members.  Based on the new Tax Court case, some LLC members may be entitled to refunds for prior years.  Call us at (816) 792-9966 to see if this case affects your situation.

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