The OP asked the question in relation to C Corporation. What is the answer for a LLC taxed as a partnership filing Form 1065?
We know that an operating loss from marketing, etc. expenses is NOT offset on the 1065 by investment income (interest, dividends capital gains from investments owned by the LLC). Unlike a C Corp., the operating loss is reported separately on the 1065 and the K-1 from the investment gain.
We are preparing returns on TurboTax for an LLC which owns operating businesses, but also has investments in traded securities. The business of the LLC is managing the subsidiaries plus managing the investments.
The LLC has business operating expenses which show a loss for net income purposes, with a gain on investments (interest, dividends, capital gains) which more than offset the operating loss. Also the net income from the subsidiaries is positive but does not fully offset the operating expenses.
Our question is whether the operating loss could be deemed by IRS to be a Hobby Loss or similar, because the LLC doesn't show a "profit" even though, if it were a C Corp, it would be showing a profit under same circumstances, ie, the investment income more than offsetting the operating expenses. Our understanding is that such a Hobby Loss or similar would limit deny the deductibility of the operating loss on the LLC owners' returns. Talking about risk of Hobby Loss determination after several years of operating losses (and investment gains). The LLC won't qualify as a Trader, so we have to be cognizant of whether this will sooner or later be called a Hobby Loss by IRS.
Or would IRS ordinarily do an informal calculation to net the investment gains against operating expenses, as in a C Corp., and understand that the LLC is actually making a "profit"?
Are there any IRS Publications, Q&A, etc. which cover this situation for LLCs taxed as partnerships?
Does it make any difference if the LLC elects to be taxed as corporation and files 1120-S? It would seem that, since S Corp. is also a pass-through, the same ambiguity applies like LLC filing 1065?
In addition, are there any other considerations to note where an LLC has investment income higher than operating expenses, but can't offset them on the 1065, so the 1065 shows a loss which is wanted to be deductible on the tax returns of the LLC's owners?
