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Level 2

Solved

Two-member LLC with loss for the year

Forum|Forum|2 months ago
May 4, 2026
2 replies
180 views

I have a two-member LLC with my wife that is taxed as an S-Corp. The business had a loss for the year, but my wife was passive for the first 9 months of the year and active for the last three months of the year. Can she still claim the loss against her W2 income she received while passive?

Not A Product Question

Best answer by Rick19744

When applying the material participation rules, participation by a shareholder’s spouse is considered participation by the shareholder.

While your facts are not clear, I am assuming that you did meet the material participation threshold.

If that in fact is correct, if you file a joint tax return, you can both claim material participation for the full year.

Edit:

The above assumes that you both have tax basis in your S corporation's stock (or debt basis) in order to take the losses.

Level 15

"Material Participation" (which is the factor for determining passive vs non-passive for non-rentals) is based on the entire year. You can check if she meets any of the Material Participation test by looking at the IRS link below.

https://www.irs.gov/publications/p925#en_US_2025_publink1000104581

Answer

Level 13

When applying the material participation rules, participation by a shareholder’s spouse is considered participation by the shareholder.

While your facts are not clear, I am assuming that you did meet the material participation threshold.

If that in fact is correct, if you file a joint tax return, you can both claim material participation for the full year.

Edit:

The above assumes that you both have tax basis in your S corporation's stock (or debt basis) in order to take the losses.

*A reminder that posts in a forum such as this do not constitute tax advice.Also keep in mind the date of replies, as tax law changes.

Level 2

Yes, I do meet the material participation threshold and we both have a basis in the company.

Level 13

Then you are good to go.

*A reminder that posts in a forum such as this do not constitute tax advice.Also keep in mind the date of replies, as tax law changes.