Two-member LLC with loss for the year

[Fran D]

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?

[AmeliesUncle]

"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

[Rick19744 · Accepted solution]

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.

[fdelahan]

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

[Rick19744]

Then you are good to go.

[fdelahan]

Thank you both for all the help.

[Rick19744]

You are welcome.