in order for an expense to be deductible it must be ordinary and necessary. This is a determination made by the IRS upon audit. should the IRS disallow a portion of your salary, your SO can object and go to appeals or tax court to settle the matter. As a single member LLC - schedule C or E reporting the SO doesn't get a salary. they report their income and deductible expenses on the appropriate form. There is no income tax deduction for their member draws. With an LLC taxed as an S-Corp the SO must take a reasonable salary for which they get a deduction on the S-Corp return.
Another possible problem for your SO. losses over a span of years can be deemed a hobby by the IRS which could result in severe tax consequences. This would be exacerbated with a salary increase for you.
Your remarks raise another possible issue, where is the money coming from to pay the SO draws and your salary and other expenses if it is constantly showing a tax loss. Though one possibility is large depreciation deductions.
The best thing for you and your SO to do is to sit down with a tax pro and go over the numbers.
