Question

What happens to passive losses of a S corp or partnership?

Answer 1

Passive losses in an S corporation or partnership can generally be carried forward to offset passive income in future years, and entities like a limited liability partnership provide protection from losing personal assets.

Step-by-step explanation:

What happens to the passive losses of an S corp. or partnership? In the case of an S corporation or a partnership, passive losses are financial losses that are not directly derived from the active participation in the business. These losses are typically limited to the amount of income from passive activities, and any excess losses may be carried forward to future tax years to be deducted against passive income generated in those years. A limited liability partnership (LLP) helps to limit the partner’s financial exposure to their investment in the company, ensuring that they do not risk personal assets if the company fails.

This differs from a general partnership, where there is personal liability by all owners, and one partner's adverse actions could impact all others, resulting in potentially losing personal assets in cases of bankruptcy or lawsuits. Incorporation, as in the case of an S corporation, allows entrepreneurs to enjoy profits while limiting their financial and legal liabilities beyond the time and capital invested in the business. It is important to understand the distinction between different business entities, such as LLPs and general partnerships, and how they handle business debts and liabilities. The protection mechanisms embedded in the structure of an S Corp. or LLP are crucial aspects that entrepreneurs consider to mitigate risks associated with the loss of personal assets.

Answer 2

Passive losses in an S corporation or partnership can be used to offset passive income, but not active income. Excess losses are carried forward to future tax years until sufficient passive income is generated or the investment is disposed of.

Step-by-step explanation:

When it comes to an S corporation or partnership, passive losses are losses from business activities in which the taxpayer does not materially participate. These losses can offset other passive income, but cannot be used to reduce income from active business operations or salaries.

If the passive losses exceed the passive income in a given year, the excess losses are not lost but are suspended and can be carried forward to future tax years to offset future passive income. This carryforward continues until the taxpayer has enough passive income to offset the losses or disposes of the investment that produced the passive losses. It should be noted that different tax treatments apply to S corporations and partnerships regarding how passive losses are handled at the individual level, based on the taxpayer's level of participation and the basis they have in the investment.