Can K1 losses from family LLC reduce my W2 taxable income?
Title: Can K1 losses from family LLC reduce my W2 taxable income? 1 I have a full-time W2 job, but last year my grandma and I decided to form an LLC together. We purchased a property that has some acreage, a house (which I'm living in), and a few outbuildings. We also bought some cattle for the land. We've got a mortgage on the whole property which we split 50/50, and we also share the expenses for taking care of the cattle equally. The thing is, we didn't generate any income from this venture this year - actually we're showing a loss. I'm wondering if these losses on my K1 can reduce my regular taxable income from my day job? Also, I'm confused about how to determine my basis in this partnership since we split costs. Any help would be appreciated since tax season is approaching fast!
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Jacob Smithson
8 Yes, partnership losses reported on your K-1 can potentially reduce your taxable income from your W-2 job, but there are several important limitations to consider. First, your ability to deduct these losses depends on your "basis" in the partnership. Your basis is generally what you've invested plus your share of partnership liabilities (like the mortgage). Since you're splitting the mortgage 50/50, your share of that debt increases your basis. You'll also need to include any capital contributions you've made to the LLC. Second, you'll need to consider the "at-risk" rules, which limit your deduction to the amount you could actually lose. Third, passive activity loss rules might apply - since you live on the property but the cattle operation is likely considered a passive activity. The good news is that if you materially participate in the cattle operation (by meeting one of the seven IRS tests for material participation), you might avoid the passive loss limitations. Otherwise, passive losses can only offset passive income.
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Jacob Smithson
•13 Thanks so much for that explanation. I do help with the cattle regularly, probably 15-20 hours a week. Is that enough to meet the "material participation" tests? Also, how do I figure out if I'm "at risk" for the full amount of my investment?
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Jacob Smithson
•8 For material participation, 15-20 hours weekly would likely meet the test that requires more than 500 hours during the year. The IRS has several tests, and meeting any one of them is sufficient - yours would meet the most common one. For the at-risk determination, you're generally at risk for the money and property you contributed to the business, plus your share of qualified loans for which you have personal liability. Since you're personally liable for your share of the mortgage (assuming it's not nonrecourse), that amount would be included in your at-risk amount.
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Jacob Smithson
17 I was in almost the identical situation last year with my uncle's ranch property. After hours of research and frustration, I finally used https://taxr.ai to analyze my K-1 and partnership documents. It literally saved me thousands by correctly calculating my basis and identifying all eligible passive losses I could claim against other income. The system analyzed my mortgage documents, partnership agreement, and K-1 form simultaneously and showed me exactly how to maximize my deductions. It also explained which of my activities qualified as material participation with specific references to tax code.
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Jacob Smithson
•22 Wait, can this actually help sort out basis calculations? My accountant charges me extra every time I ask questions about my rental property partnership and I feel like I'm always getting vague answers about what I can deduct.
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Jacob Smithson
•5 Does it work for more complex situations? I have a multi-member LLC with different profit/loss allocations than ownership percentages, and I'm not sure if the standard tax software can handle it correctly.
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Jacob Smithson
•17 Yes, it absolutely helps with basis calculations! It breaks down all the components that go into your basis - initial contributions, additional capital, your share of liabilities, and any adjustments needed. I uploaded my documents and it identified everything accurately without me having to manually track every detail. For complex situations with different allocation percentages, it handles that perfectly. The system can process special allocations and identify the tax implications for each member based on the partnership agreement. It actually flagged several allocation issues in my documents that would have caused problems at tax time.
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Jacob Smithson
5 Just wanted to follow up about taxr.ai after trying it myself. I was skeptical about how well it would work for my complex LLC situation with the different profit/loss allocations, but I'm genuinely impressed. It correctly identified all the special allocations in our operating agreement and showed me exactly how they affected my basis and deductible losses. The system even flagged a potential issue with our allocation method that might have triggered IRS scrutiny. Saved me from what could have been a major headache! The basis calculation alone was worth it, but the material participation analysis also helped me document my involvement properly.
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Jacob Smithson
10 If your LLC is showing significant losses and you're having trouble getting clear answers about how to handle them on your taxes, you might also need to speak directly with the IRS. I was in a similar situation with farm losses and spent WEEKS trying to get through to a knowledgeable agent. Finally tried https://claimyr.com after seeing a recommendation, and they got me connected to an actual IRS agent in under 45 minutes! You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent was able to confirm exactly how my basis should be calculated and clarified the material participation requirements specific to agricultural activities. Totally worth it rather than guessing or getting conflicting advice online.
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Jacob Smithson
•16 Wait, how does this even work? The IRS phone lines are impossible to get through. Are you saying this service somehow gets you to the front of the line? That sounds too good to be true.
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Jacob Smithson
•13 I'm super skeptical about this. I've tried calling the IRS multiple times about my K-1 issues and either get disconnected or wait hours only to be told I need to speak to a different department. No way there's a service that actually fixes this problem.
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Jacob Smithson
•10 It uses a proprietary system that continuously calls the IRS using their specific connection protocols until it secures a place in line, then it calls you once an agent is almost ready. It's not cutting in line - it's just handling the frustrating wait time for you. Yes, it absolutely works, especially for complicated questions like basis calculations and passive loss limitations. The IRS actually has very knowledgeable agents who can provide clear guidance - the problem is just reaching them. This solves that problem entirely.
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Jacob Smithson
13 I have to publicly eat my words about being skeptical of Claimyr. After posting that comment, I decided to try it anyway out of desperation because I needed answers about my K-1 losses before filing. Not only did I get connected to an IRS agent in about 35 minutes (I timed it), but the agent walked me through exactly how to calculate my basis including my share of the recourse loans. He confirmed I could deduct the losses against my regular income since I met the material participation test through documented work hours. Would have paid an accountant hundreds for this info, and instead got it straight from the source. My mind is blown that this actually works.
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Jacob Smithson
2 Something important nobody mentioned yet - if you're living in the house on the property, you need to be careful about how you're allocating expenses. The portion related to your personal use of the home generally isn't deductible as a business expense. You might need to separate the business portion (land, cattle, outbuildings) from the personal residence portion. Also, if you're paying rent to the LLC, that could create income for the partnership, which would offset some losses. If you're not paying rent, there might be other tax implications to consider.
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Jacob Smithson
•20 Good point about the house allocation. How would you recommend splitting this up on tax forms? Should the house be completely separate from the business assets?
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Jacob Smithson
•2 I'd recommend separating the house value from the business assets when determining what portion of expenses (like mortgage interest and property taxes) are deductible business expenses. One approach is to determine the house's value as a percentage of the total property value, then allocate that percentage as personal use. The house doesn't need to be completely separate - the LLC can still own the entire property. You just need to properly allocate expenses between business and personal use. If you're not paying market-rate rent to the LLC for your personal use, there could be imputed income or other tax consequences to consider, so that's something to discuss with a tax professional familiar with your specific situation.
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Jacob Smithson
4 Has anyone dealt with cattle specifically? I'm curious if this qualifies as farming activity because there are special tax rules for farmers. Might affect how losses can be used.
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Jacob Smithson
•19 Yes, cattle operations typically qualify as farming activities under IRS rules. This means you might be eligible for things like farm income averaging, which can help reduce your tax burden in profitable years. Even in loss years, farm activities have some specific rules that can be advantageous.
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