If your business is a multiple-member LLC or LLP (limited liability partnership) or a regular partnership, you can also offset losses, up to the amount of your investment "basis" in the business. It is easiest to look at an example to see how this works:
- Jim and Tom are partners in small consulting firm. They both put $10,000 into the business and are sharing profits and losses 50/50. They also took out a loan for $30,000 for startup. The initial basis for each partner is $20,000 ($5,000 plus $15,000).
- The first year, they had income of $5,000 and expenses of $25,000, for a loss of $20,000. They split the loss 50/50, so each has a loss of $10,000. Since they have a $15,000 basis, they can each take their full share of the loss to offset other personal income for the year.
- This leaves Jim and Tom with a basis of $5,000 the next year, unless they take out other loans or add to their investment. If their loss is greater than $5,000 each, they can only take the loss up to the $5,000.
