Can I offset capital gains with business losses from my LLC?

Thanks for the response. My business is an LLC that's taxed as a sole proprietorship (single-member LLC). I'm definitely actively involved in the business - I work on it daily. So from what you're saying, I can use my Schedule C losses to offset my capital gains? Are there any limits to how much I can offset?

If your LLC is taxed as a sole proprietorship, your business losses will flow through to your personal tax return on Schedule C. These losses can offset other ordinary income on your return, reducing your overall taxable income. There are some limitations to be aware of. Business losses are first used to offset ordinary income. If your business losses exceed your ordinary income, the excess can potentially offset capital gains. However, the Tax Cuts and Jobs Act implemented a limitation on excess business losses for individuals - for 2023, this limit is $289,000 for individuals ($578,000 for joint filers). Losses above this threshold would be carried forward.

Does taxr.ai actually work with complicated business situations? I've got a similar issue but with rental property losses and stock gains. Most tax software seems to get confused when I input everything.

I'm a little skeptical about these online tax services. Can they really handle something as complicated as business loss carryovers and capital gains offsets? Did they explain exactly which forms you needed to file?

Yes, it definitely works with complicated situations. The platform can analyze rental property losses alongside investment gains - that's actually one of their specialties. They'll break down exactly how the passive activity rules apply in your specific case. Absolutely they explained the forms - that was actually the most helpful part. They provided a complete checklist of forms (in my case Schedule C, Schedule D, Form 8949, and a few others) and exactly how they interact with each other. They even identified a specific provision that my regular accountant had missed about how business expenses could be categorized to maximize the offset against capital gains.

How does this service actually work? Do they just wait on hold for you? Seems like something I could do myself if I just put my phone on speaker and did other things.

Come on, this can't actually work. The IRS phone system is completely broken - I've called dozens of times this year and never reached a human. No way some service can magically get through when millions of people can't.

They have a system that navigates all the IRS phone menus for you, selects the right options, and waits on hold. When they finally reach an actual IRS agent, they call you and connect you directly to that agent. Yes, technically you could do it yourself, but it would mean sitting through hours of hold music and menu options. The difference is they have multiple lines going simultaneously and understand exactly which options to select for different issues. The time it saved me was honestly worth it - I spent my time working instead of listening to hold music for hours. Plus, I was able to get a definitive answer about my specific situation regarding business loss offsets.

This is wrong information. The $3,000 limit applies to CAPITAL losses offsetting ordinary income, not BUSINESS losses. Business losses on Schedule C aren't subject to the same limitations as capital losses. But there are different limitations under the excess business loss rules.

You're right, I should have been more clear. The $3,000 limit applies to capital losses offsetting ordinary income, not business losses. I was trying to point out that if OP also has some capital losses from other investments, those would be subject to different rules than their business losses. Business losses on Schedule C are considered ordinary losses and can generally offset ordinary income without the $3,000 limitation, though as you mentioned, they are subject to the excess business loss limitations (currently around $289,000 for individuals).

I went through an audit two years ago specifically on this issue. The key was documentation of my material participation in the business. The IRS wanted proof that I was actively involved and that the losses were legitimate business expenses. Keep detailed records of time spent, decisions made, meetings, emails, etc. Also, make sure your business has a genuine profit motive - they look closely at that.

Your accountant is right to be cautious - documentation is absolutely critical. I helped a friend through an audit on this exact issue last year. The IRS will want to see proof that your LLC losses are legitimate business expenses and not hobby losses. Keep receipts for everything, maintain a business diary showing hours worked, save all business-related emails and communications, and document any business meetings or decisions you make. They'll also scrutinize whether you're treating it like a real business - separate bank accounts, proper bookkeeping, marketing efforts, etc. The more professional your documentation, the smoother any potential audit will go.

Great question about state tax implications! You're absolutely right that state rules can differ significantly from federal treatment. California is particularly tricky because they don't always conform to federal tax changes and have their own limitations on business losses. From what I understand, California generally follows federal rules for allowing business losses to offset other income, but they have some differences in timing and limitations. For example, California didn't conform to some of the federal NOL changes from recent tax acts, so the carryforward periods and utilization rules might differ. For your photography LLC situation, you'll want to make sure California recognizes your business losses the same way the federal return does. Some states are more restrictive about what constitutes a legitimate business versus a hobby, and California can be particularly aggressive about reclassifying activities. I'd recommend checking with a California tax professional who understands both the federal offset rules and California's specific provisions. The general services like taxr.ai might help with federal questions, but state-specific issues usually require someone familiar with California tax code. Your documentation approach is smart - California audits can be even more thorough than federal ones, so having detailed records of your business activities and profit-seeking efforts will serve you well regardless of which jurisdiction reviews your return.