Pass-Through Tax Guide

Entity Chooser Tax Flow Comparison Loss Rules

Start by Choosing Your Business Structure

Select one of the common business types below to see how its income, deductions, and losses are reported on an owner's tax return. The information throughout this guide will dynamically update based on your selection.

How Your Income Flows to Your Tax Return

Comparing Entity Characteristics

This chart compares key legal and tax attributes across different business structures. Your selected entity is highlighted for easy comparison. These factors are crucial when deciding on the optimal structure for your venture.

Can You Deduct a Business Loss? The Three Hurdles

Receiving a K-1 with a loss doesn't guarantee you can deduct it. The IRS requires a loss to clear three sequential hurdles. A loss is tested against each limit in order, and if it fails at any stage, it is suspended at that point. Hover over each hurdle to learn more.

HURDLE 1

Tax Basis Limitation

You cannot deduct losses that exceed your adjusted basis (your total investment) in the entity.

HURDLE 2

At-Risk Limitation

After clearing the basis hurdle, you can only deduct losses up to the amount you are personally "at risk" of losing (e.g., your cash investment and recourse debt).

HURDLE 3

Passive Activity Loss Limitation

Finally, if you don't "materially participate" in the business, your losses are considered "passive" and can generally only offset income from other passive activities, not your wages or portfolio income.

This interactive guide is for informational purposes only and does not constitute tax advice. Consult a qualified professional.