How Many Years Can An LLC Show A Loss?

  • John A. Osborne
  • Dec 01, 2022
Small Business Insurance Delaware

Starting a business is a big risk that requires hard work, dedication, and a lot of financial investment. Many entrepreneurs begin their journey by forming a Limited Liability Company (LLC) because of the flexibility and protection it provides. However, running an LLC can be challenging, especially when it comes to managing finances. One of the most common questions that LLC owners ask is how many years they can show a loss before the IRS takes action. In this article, we will explore this topic in detail and provide you with the information you need to make informed decisions for your business.

What is an LLC?

Before we dive into the main topic, let’s briefly discuss what an LLC is. An LLC is a type of business structure that combines the benefits of a partnership and a corporation. It provides personal liability protection to its owners, known as members, and allows for pass-through taxation. This means that the LLC’s profits and losses are reported on the members’ personal tax returns, and the LLC itself does not pay federal income tax. LLCs are popular among small business owners because they are easy to set up, have fewer formalities than other business structures, and offer flexibility in management and ownership.

How Many Years Can an LLC Show a Loss?

When an LLC experiences more expenses than revenue, it results in a net operating loss (NOL). An NOL can be carried forward or backward to offset future or previous taxable income, respectively. The IRS allows LLCs to carry forward their NOLs for up to 20 years to minimize their tax burden. However, there are some restrictions that LLC owners should be aware of:

  • LLCs can only carry forward NOLs if they have filed their tax returns on time
  • LLCs cannot carry back NOLs to previous tax years
  • LLCs cannot use NOLs to offset income earned in other tax years

It’s important to note that while LLCs can show a loss for multiple years, doing so may raise red flags with the IRS. When an LLC consistently reports losses, the IRS may question whether the business is a legitimate venture or a hobby. If the IRS determines that the LLC is not a legitimate business, it may disallow some or all of the losses claimed and require the LLC to pay back taxes, interest, and penalties.

How to Handle Losses as an LLC

As an LLC owner, you can take several steps to minimize losses and avoid IRS scrutiny:

  • Develop a comprehensive business plan that outlines your revenue streams, expenses, and growth strategies
  • Track your finances regularly and make adjustments as needed to stay on track
  • Consider seeking professional advice from an accountant or financial advisor to help you manage your finances and taxes
  • Be prepared to provide evidence that your LLC is a legitimate business and not a hobby
  • Consider restructuring your LLC or changing your business model if you consistently report losses for several years

By taking these steps, you can show the IRS that your LLC is a legitimate and viable business, even if it experiences losses in some years.


In conclusion, LLCs can show a loss for up to 20 years and use their NOLs to offset taxable income in future tax years. However, LLC owners should be aware of the restrictions and potential consequences of consistently reporting losses. By developing a solid business plan, tracking finances regularly, seeking professional advice, and providing evidence of a legitimate business, LLC owners can minimize losses and avoid IRS scrutiny. Remember, running an LLC is a long-term investment, and it’s important to manage finances wisely to ensure long-term success.

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