Are investments into startups or investment funds tax deductible?

[adobeee123]

In 2016 I invested $30,000 of post-tax income into a friend's private equity fund as a limited partner using my California LLC that is owned 50/50 between my wife and me. I will be issued a 2016 K-1 and I can deduct my % ownership portion against fund and portfolio company startup costs. 

However, is the original $30,000 investment tax deductible against my income? I work full-time at a completely separate financial services firm as a W-2 employee.

[MinhT · Accepted solution]

Unfortunately, your investment in the private equity fund is not tax deductible.

[mitulpat1203]

To add to this conversation.  Is it better to invest into startups as an individual or as an LLC?  I already have an LLC set up for another business my wife and I are thinking of starting up and thought I could use that LLC for this type of investment also.  Wonder what the pros and cons are.

[Mike9241]

Is it better to invest into startups as an individual or as an LLC?

doesn't matter a single-member LLC is treated as if it does not exist for federal income tax purpose

I already have an LLC set up for another business my wife and I are thinking of starting up and thought I could use that LLC for this type of investment also. Wonder what the pros and cons are. 

whether the investment is held personally or through the LLC the overall tax treatment is the same.   you do not get a write-off for the investment. until it goes belly up or you sell. if the investment is in stocks, bonds or related securities you pay income taxes on dividends, interest, and report gain or loss upon disposition. for an S-Corp or partnership - you get a k-1 that gets entered on your return. whether there are any immediate tax benefits tax depends on many factors. see a tax pro to go over this. if a private C-corp there are no immediate benefits except if it pays dividends. 

[mitul1203]

Thanks for the detailed answer @Mike. 

1) What about in the benefit of being able to pass on the equity holdings (equity in startups in this case) to other people.  With an LLC you can transfer it to or add people into the LLC without triggering taxes.  Whereas, if it were to be help individually and I pass on, wouldn't the inheriting person have to pay taxes on that equity that is being passed on to them?  Or will taxes only be paid if the owner sell stake in the company.

2) If there were profits generated from the startup investments within the LLC, wouldn't I be able to write off expenses against that profit?  I can't do that if I invested individually.