Suspended Loss

What is a suspended loss?

A suspended loss is a tax loss you cannot deduct in the current year due to limitation rules. Common limitations include insufficient basis in pass-through entities, at-risk rules, and passive activity loss rules. The loss does not disappear. It carries forward to future years when you have sufficient basis, at-risk amounts, or passive income to absorb it. Tracking suspended losses ensures you eventually claim deductions you are entitled to.

Why losses get suspended

S corporation losses cannot exceed your stock and debt basis. Partnership and LLC losses face similar basis limitations plus at-risk rules. Passive activity losses from businesses you do not materially participate in can only offset passive income. Each limitation applies independently. A loss might pass one test but fail another. Your K-1 shows your share of loss, but your personal return reflects what you can actually deduct.

Using suspended losses later

When circumstances change, suspended losses become deductible. Additional capital contributions increase basis. New passive income absorbs passive losses. Selling your entire interest in a passive activity releases suspended losses. Your accountant should track suspended losses by category and limitation type. Without this tracking, you may miss deductions or incorrectly claim losses you cannot yet use.