Is it better to combine two businesses for tax purposes if one business is very profitable and one is not profitable?

Answer 1

I am assuming each company is in a different business??? Again, seek counsel but the following usually applies:

Form a corporation or LLC. An LLC might be simpler for this purpose. Have the LLC acquire both of the businesses in exchange for Membership Units (LLC's version of stock) which they will issue to you. Each company can be run independently and books kept seperate. However, at the end of the year, the LLC will consolidate their books and file one single tax return with the IRS. Since an LLC is a flow-through entity, all tax liability flows to the Members perportionately. Losses in one business will automatically offset gains in another. Instead of getting a 1099 or W2, you will get a K1 which you will file with your personal return. The K1 will show your allocation (100%) of the gains and losses. A K1 is usually treated as "passive income". This way, losses from a business can be used to offset other personal losses that may not be ordinariliy deductable. The LLC never writes a check to the IRS. You write a check only if you show adjusted gross income.

This is one creative way to avoid IRS noses when consecutively operating a business with ongoing losses which they may otherwise consider a "hobby". They only ever see one consolidated P&L.

To minimize tax liability it is generally best to minimize income. Naturally I would advise visiting an accountant since many factors are involved, but as a general rule, it is best to structure your business to show the least amount of profit possible (legally of course). If the business posting a loss cannot generate a tax deduction in some manner, it does seem fair that it would be best to combine the two so that the loss at least offsets some income elsewhere (hence minimizing your tax liability). I am assuming of course that you own 100% and that there are no conflicting interests involved....