Here’s what HIVE AI had to say about “How do I report losses for a startup that fails?”:

How to report losses when a startup fails

Identify your tax posture first

• Sole proprietor or single‑member LLC taxed as disregarded entity: report the final year’s business income and deductible expenses on Schedule C with your Form 1040. A net loss flows to your return and may be limited by the at‑risk rules and excess business loss rules below. 1
• Partnership or multi‑member LLC taxed as a partnership: the entity files Form 1065 and issues each owner a Schedule K‑1. You must report the loss exactly as shown on your K‑1; using a different amount is treated as an inconsistent position. 2
• S corporation: entity files Form 1120‑S and passes losses via K‑1; shareholder‑level limits (basis, at‑risk, passive) may apply.
• C corporation: the corporation deducts its operating losses on Form 1120; any net operating loss (NOL) is kept at the corporate level.

Loss limitations that can cap or defer your deduction

At‑risk rules (Form 6198)

• Your deductible loss is generally limited to the amount you are economically at risk. If you have nonrecourse financing, guarantees, or other protections against loss, complete Form 6198 and limit the deduction accordingly. 3

Excess business loss (Form 461)

• Noncorporate taxpayers must apply the excess business loss limit. For 2024 returns, if total business losses exceed the annual threshold, the “excess” is disallowed in the current year and carried forward as an NOL. Use Form 461 to compute and report this. 4

Profit motive (hobby‑loss risk)

• A string of losses in the start‑up phase does not automatically negate profit motive, but persistent unexplained losses can. The nine‑factor test in the regulations governs this determination. Document commercial activity, market efforts, and why losses occurred. 5
• Examiners specifically look at whether you are still in a normal start‑up phase for your industry; contemporaneous records and industry data help substantiate a genuine profit objective. 6

Start‑up and organizational costs if the business never fully launches

• Investigatory costs to explore and evaluate entering a new business (not tied to acquiring a specific target) are start‑up expenditures eligible for amortization; acquisition‑related costs must be capitalized. If a specific acquisition attempt is abandoned, a Section 165 loss may be available for those capitalized costs. 7

Abandonment and worthless interests when the venture is shut down

Abandonment losses

• If you permanently abandon specific property or a project and receive no value, an ordinary loss under Section 165 may be allowed in the year of abandonment, provided you can show an intent to abandon and an affirmative act of abandonment. The regulations cross‑reference Section 165’s general loss rules. 8

Worthless equity or debt in the failed venture

• A loss for worthless stock or a wholly insolvent entity generally requires proof of worthlessness via identifiable events or a balance‑sheet showing liabilities so far exceed assets that there is no reasonable hope of recovery. Timing the deduction depends on when worthlessness becomes fixed by those events. 9

Net operating losses (NOLs)

• If the deductible loss exceeds your income (after applying limits above), you may have an NOL that carries forward under Section 172. Revenue rulings discuss computing and applying NOLs; for individuals, nonbusiness deductions are limited in NOL computations. 10

Reporting mechanics by scenario

Sole proprietor/single‑member LLC

• Report final‑year ordinary expenses and remaining write‑offs on Schedule C. Apply at‑risk limits (Form 6198) and the excess business loss limit (Form 461) as applicable. 1
• If you abandoned specific business property with no proceeds, consider a Section 165 ordinary loss in the year of abandonment, with documentation of the act and intent. 8

Partnership/multi‑member LLC

• File the final Form 1065 and issue K‑1s; each partner reports losses as shown and subject to partner‑level limits (basis, at‑risk, passive, excess business loss). Do not report an amount inconsistent with the partnership return without following consistency procedures. 2

S corporation

• File the final Form 1120‑S; shareholder K‑1 losses are limited to stock and loan basis, at‑risk, passive, and excess business loss rules. If shareholder loans became worthless, consider timing and character under worthlessness principles. 9

C corporation

• Deduct final‑year operating losses on Form 1120. If the company abandons assets or determines subsidiaries’ stock is worthless, apply Section 165 timing and proof standards; any resulting NOL remains at the corporate level under Section 172 principles. 10

Documentation to keep

• Evidence of cessation: board resolutions, shutdown notices, cancelled leases, asset sale/abandonment records, and final payroll/insurance terminations. This supports abandonment or worthlessness timing under Section 165. 8
• Profit‑motive records: budgets, market studies, pivot plans, investor decks, and industry data on normal start‑up periods, to address hobby‑loss scrutiny. 6

If you tell me your entity type (sole prop, partnership/LLC, S‑corp, C‑corp), how you funded it (loans vs equity), and whether there are assets left to sell or abandon, I’ll map the exact forms, character of each loss, and the ordering of limitations for your situation.

Sources

1 – IRS – Publication 4128 Tax Impact of Job Loss 📄 Summarize
2 – Treasury Regulation 301.6222-1 📄 Summarize
3 – IRS – Instruction 1040 (Schedule C) Instructions for Schedule C (Form 1040), Profit or Loss From Business 📄 Summarize
4 – IRS.gov – Instructions for Form 461 (2024) 📄 Summarize
5 – Treasury Regulation 1.183-2 📄 Summarize
6 – IRS – Publication 5558 Activities Not Engaged in for Profit Audit Technique Guide Internal Revenue Code Section 183 📄 Summarize
7 – TAM 200532048 📄 Summarize
8 – Treasury Regulation 1.616-2 📄 Summarize
9 – CCA 200242004 📄 Summarize
10 – Rev. Rul. 2009-9 📄 Summarize

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