This paper intends to analyze the accuracy of incremental DC methods for loss allocation in electricity markets. The model under implementation at the Brazilian electricity market is one of this kind and has motivated this investigation. The model to be used in Brazil is based on incremental methods and defines loss factors for generators and loads. This technique uses a DC load flow to calculate the loss factor, and so it does not consider the complete power flow equations. Consequently, this method may provide unfair loss allocation depending on the system operation condition. Hence a method is developed to calculate the loss factors, based on incremental methods but using an AC load flow that takes into account the system nonlinearity. Both methods are applied to a small system for conceptual discussions and to a version of the Brazilian North-Northwest system for the validation of the results by using a real system. The results demonstrate the limitations of the DC method for loss allocation, justifying the use of an AC load flow to calculate the total system losses and the loss factors. The loss factors calculated by both methods depend on the choice of the slack bus. In order to overcome this limitation, the concept of distributed slack bus is included into the AC power flow, and new slack-bus independent results are obtained.