SMLLC - Deduct Business Expenses from Capital Gains

[TWilk]

Hello Team,

I have a Single Member LLC business that is a pass through entity. It provided a loan and has earned interest on that loan (overall net income for the year)

The business has accrued several expenses in attempt to grow (office supplies, new client meetings, etc). The business has a net *profit* currently and will be reporting income pass through. Am I able to deduct business expenses from this business income?

I have read a lot on PAL (passive activity loss) rules, but this only seems to apply if you are claiming a business net LOSS overall and the regulations appear to only limit taking LOSSES as pass through. As far as I can see, this would NOT apply since the business has a net GAIN for the year, but I am unclear if this is passive income still has regulations on what business expenses can be deducted from it.

In a follow up, would this be different if the business then invests in mutual funds/index funds and business expenses deducted from those capital gains?

I greatly enjoy learning these details but have hit a road block in this search for this specific instance. Thank you for any information you can provide!  

[Critter-3]

Since you are in the business of lending money AND you registered as a single member LLC then all the income and expenses are reported on the Sch C.   The PAL rules don't come into play in this situation.

In a follow up, would this be different if the business then invests in mutual funds/index funds and business expenses deducted from those capital gains?    

WHY would you ever use a Sch C for investments where you get to pay SE taxes on the profit ???   Investing in the market is a personal situation NOT a business ( unless you are in the business of doing investments like a stock broker).  All personal investment income is entered on the form 1040 in it's correct section ... do NOT use the Sch C or the business EIN for this matter. 

[Anonymous_]

I agree with @Critter-3. 

PAL rules do not apply to losses from an active trade or business (hence the word "passive" as the first word).

Also, if you are not in the business of lending money, then the interest you received is portfolio income. Moreover, any gain from the sale of securities, such as mutual funds, would be capital gain. As a single-member LLC (without an election to be treated as a corporation for federal income tax purposes), you would not deduct business expenses from portfolio income or capital gain, only from business income.

Finally, of course you can deduct legitimate business expenses from business income.

[Mike9241]

if the entity invests in securities then related expenses are investment expenses that are not currently deductible except for investment interest expense (unless you are in the business of trading securities). IIE deduction, again unless you are in the business, is limited to investment income and reported on form 4952 which carries to Schedule A - itemized deductions.  if not a business then in general, qualified dividends and net capital gain from the disposition of property held for investment are excluded from investment income. But you can elect to include part or all of these amounts in investment income. The qualified dividends and net capital gain that you elect to include in investment income aren’t eligible to be taxed at the qualified dividends or capital gains tax rates. You should consider the tax effect of using the qualified dividends and capital gains tax rates before making this election. Once made, the election can be revoked only with IRS consent.

[Critter-3]

@TWilk 

Based off the questions you have asked  I highly recommend you seek local professional assistance to get educated on what you have done, what you want to do and what is legal.