| The IRS lost a key battle in its long-running fight to limit tax deductions that can be taken by investors in small businesses in a case that could have wide implications for entrepreneurs.
The Tax Court decision would allow investors in certain kinds of businesses to deduct losses against salary and investment income. Right now, investors often can only deduct losses in a business against future profits from that business, which in some cases prevents taxpayers from getting to use the deductions at all.
The case, which involved Nebraska farmers seeking to deduct losses from their chicken and pig operations, can still be appealed by the IRS, but makes loss deductions much easier to obtain for some investors.
The ruling should be broadly applicable, says Carolyn Turnbull of Moore, Stephens & Tiller, an Atlanta certified public accounting firm. "This decision was about hog and egg operations, but it could just as easily have been about a tech start-up, restaurant or manufacturer." Tax advisers across the country will likely tell their clients to begin taking these deductions based on the Tax Court ruling.
The decision specifically applies to investors in limited-liability companies and limited-liability partnerships and benefits those who actively work in several businesses. One example would be a Microsoft engineer who owns a stake in a local restaurant and tends bar twice a week. His spouse, meanwhile, is a part owner of a money-losing gift shop, where she works a few hours a week.
Under this decision, losses from the two businesses could offset salary or investment income earned by both.
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