Can a Single Member LLC with no income use losses to offset my W-2 earnings?

This is actually a concerning situation from a tax perspective. What you're describing sounds like it could be classified as a hobby rather than a business in the IRS's eyes, especially if it continues to generate losses year after year with no direct income. For a business activity to be legitimate in the eyes of the IRS, it needs to have a profit motive and be engaged in with continuity and regularity. If your LLC consistently shows losses with no direct revenue, the IRS might determine it's not a genuine business activity and disallow those losses against your W-2 income. The fact that you're using the LLC expenses to indirectly increase your W-2 income rather than generate direct business income could be problematic. The IRS typically looks for businesses to show a profit in at least 3 out of 5 consecutive years to avoid the hobby loss rules. I'd recommend documenting your business plan showing your intention to eventually transition to serving these clients directly through your LLC. Keep detailed records of how your marketing activities connect to specific clients and income, and perhaps consider having the LLC bill your employer directly for marketing services to establish a clearer business purpose and income stream.

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I want to follow up on my skeptical comment above. I decided to try https://taxr.ai after continuing to struggle with my LLC tax situation. I was surprised how helpful it actually was for my situation. My LLC was also operating at a loss while I earned W-2 income, and I was worried about the hobby loss rules the other commenters mentioned. The service helped me understand that I needed to establish a clear connection between my business activities and potential profits. They reviewed my situation and helped me create proper documentation of my business plan, including projected timeline to profitability. They also suggested I restructure some of my activities so the LLC could directly bill for services rather than just supporting my W-2 role. What impressed me most was the specific guidance on which deductions were legitimate for my situation and how to properly document everything to reduce audit risk. Definitely worth checking out if you're in a complicated LLC situation.

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I have to apologize for my skeptical comment above. After continuing to hit dead ends trying to reach the IRS myself, I broke down and tried the Claimyr service from https://claimyr.com. I was genuinely shocked when I got a call back about 45 minutes later with an actual IRS agent on the line. I explained my situation with my LLC showing losses while supporting my W-2 position, and the agent provided really helpful guidance. The agent explained that I needed to demonstrate that my business activities were engaged in with a genuine profit motive, even if they currently result in losses. They directed me to specific IRS publications that outline the nine factors they use to determine if an activity is a business or hobby, and suggested I keep detailed documentation showing how my business decisions are aimed at eventually generating profit. What a relief to finally get clear information! Definitely worth it after spending weeks trying to get through on my own.

This sounds a lot like what the IRS calls "not engaged in for profit" activities. I'm not a tax pro, but I've dealt with this. To be blunt, I think your accountant's advice is questionable. The key issue is whether your LLC has a genuine profit motive as its primary purpose. The fact that you're using it to increase your W-2 income rather than generate its own profit is problematic. The IRS usually expects to see a profit in 3 out of 5 consecutive years. You might want to consider restructuring this arrangement - maybe have your LLC bill your employer directly for the marketing services? That would establish a clearer business purpose and direct income stream.

I think everyone is missing that this is actually a Schedule C issue, not really an LLC issue. Since a single-member LLC is a disregarded entity, you're filing a Schedule C with your personal return. The real question is: can you deduct these business expenses on Schedule C when they're indirectly increasing your W-2 income rather than generating Schedule C income? The answer is complicated. You'd need to prove you have a legitimate business (not a hobby) with a clear profit motive. The fact that you intend to eventually serve these clients directly might help establish that. But I think there's a more immediate problem: the expenses you're incurring need to be ordinary and necessary for YOUR business. If your business doesn't have income yet, the IRS might question how these expenses are necessary for a non-existent business rather than just supporting your employment.