In this video, we discuss the deduction of business losses for various business entities.
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Choosing the right business structure can significantly impact taxation, especially regarding how losses are handled. Flow-through entities, such as partnerships and S corporations, allow losses to pass directly to the owners, who can then offset their other income, offering a potential tax advantage. This feature is particularly beneficial for new businesses, which often face initial losses.

In a flow-through entity, if the owner has a sufficient investment in the business (known as 'basis') and actively participates in its operations, they can use the business's losses to reduce their personal tax liability immediately. This immediate benefit contrasts with the treatment of losses in C corporations, where losses do not pass through to owners but are instead carried forward or back to offset the corporation's future or past taxable income. However, the use of net operating loss (NOL) carryforwards in C corporations is capped at 80% of taxable income, a limitation not applicable to individual owners in flow-through entities.

Moreover, the capacity to deduct losses might differ between owners of partnerships and S corporations due to differences in how their basis is calculated. For partnership owners, their basis includes their share of the entity's debt, potentially increasing their ability to deduct losses. In contrast, an S corporation shareholder's basis does not include their share of the corporation's debt, possibly limiting the amount of loss they can deduct.

In summary, flow-through entities like partnerships and S corporations offer a strategic advantage for owners looking to use business losses to offset personal income, especially in the early stages of a business. The structure of these entities can provide more favorable conditions for deducting losses compared to C corporations, due to differences in how the owner's basis is calculated and the absence of certain limitations on using NOL carryforwards.






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