In the United States, including Kansas, there are no specific limitations on the number of years an LLC can show a loss on its tax returns. LLCs, like other pass-through entities such as sole proprietorships, partnerships, and S corporations, can typically carry forward net operating losses (NOLs) to future tax years to offset taxable income.
Here’s how it generally works…
- Net Operating Losses (NOLs) – If an LLC’s deductible expenses exceed its taxable income in a particular tax year, it incurs a net operating loss (NOL). This loss can be carried forward to future tax years to offset taxable income, reducing the LLC’s tax liability in those years.
- Carryforward Period – The IRS allows LLCs to carry forward NOLs for up to 20 years following the year in which the loss occurred. During this carryforward period, the LLC can use the NOL to offset taxable income in future years, potentially reducing or eliminating its tax liability.
- Carryback Option (Limited) – Before the enactment of the Tax Cuts and Jobs Act (TCJA) in 2017, LLCs could also elect to carry back NOLs to the two tax years preceding the year of the loss. Nevertheless, the TCJA eliminated the NOL carryback provision for most taxpayers, except for certain farming losses and losses incurred by certain small businesses.
- Annual Limitations – While there are no specific limitations on the number of years an LLC can carry forward NOLs, note that the IRS imposes annual limitations on the amount of NOLs that can be deducted in any given tax year. The amount of NOL that can be deducted in a particular year is generally limited to 80% of taxable income for that year, calculated before the NOL deduction.
Overall, LLCs can use NOLs to offset taxable income in future years, potentially reducing their tax liabilities over an extended period. Yet, tax laws and regulations may change over time, so LLC owners should stay informed about current tax rules and consult with tax professionals to maximize the benefits of NOLs and ensure compliance with tax laws.
