LLCs with Passive Investors - Active vs. Passive Loss Limitations

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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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