How to handle NOL on a multi-members LLC (taxed as partnership)?

Forum|Forum|5 years ago
November 24, 2020
10 replies
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Just formed a LLC which's taxed as partnership. I realize that if there is the NOL on the LLC, the partner CANNOT deduct the loss (unless it is a liquidation). What is the correct way to handle such current loss for the partnership and partners? I am assuming the partnership will report the loss on K-1 to each partner, but the partner will somehow need to keep track the loss individually and forward the loss to future years. What can TurboTax Business and/or TurboTax Individual help in this issue?

TurboTax Business Windows

Best answer by Anonymous_

You should consult directly with a tax professional in your jurisdiction for guidance and, perhaps, income tax preparation for the partnership.

Technically, a multi-member LLC can have an ordinary business loss but not an NOL; the business loss is passed through to the members on their K-1s and they, individually, may have an NOL as a result (provided they have sufficient basis in the LLC).

Further, the members need to materially participate in the LLC or the loss reported on their K-1s will be suspended under the passive activity loss rules.

Finally, the members need to keep track of the pass-through items (of income and loss) in order to calculate their outside basis in the LLC. TurboTax does not handle that matter.

Anonymous_Answer

Level 15

You should consult directly with a tax professional in your jurisdiction for guidance and, perhaps, income tax preparation for the partnership.

Further, the members need to materially participate in the LLC or the loss reported on their K-1s will be suspended under the passive activity loss rules.

Finally, the members need to keep track of the pass-through items (of income and loss) in order to calculate their outside basis in the LLC. TurboTax does not handle that matter.

easyxpressAuthor

Level 4

Let me rephrase the question.

From the code, it says: “A partner will NEVER recognize a LOSS on a current distribution”. So how does the partner handle such loss? The partner is supposed to keep track such loss separately (and carry forward to future years)?"

Anonymous

A partner will NEVER recognize a LOSS on a current distribution”. So how does the partner handle such loss? The partner is supposed to keep track such loss separately (and carry forward to future years)?

you don't seem to understand what a distribution is and what the difference is between a loss from activities conducted by the partnership and a distribution. you should really consult a tax pro.

a distribution is cash or property given from the partnership to a partner. it never enters in the computation of profit or loss from the activities conducted by the partnership. that doesn't mean it has no tax effect for the partner because a distribution reduces the partner's basis and if it goes negative then the partner has income to the extent of the negativity.

profit or loss is from the activities conducted by the partnership. this can be from renting property or selling widgets. a loss is the excess of expenses over income. if you don't understand what items are income and what are expenses and what aren't see a tax pro. the partnership can also expend money for items that under the tax laws must be treated as an asset. some assets like a building or machinery must be depreciated. land can not be depreciated. Some items could be in the nature of other assets such as real estate tax escrow - money going in isn't deductible money coming out to pay real estate taxes is deductible. Some expenses paid might not even be deductible - partner life insurance, bribes, political contributions and others. then there is the payment of liabilities such as a mortgage or bank loan. they have no effect on profit or loss.

I could go on and on about various items of bookkeeping but that would require writing a book. Then I would also have to write a book about all the tax laws that affect a partnership and partner which would likely be many times the size of the book for bookkeeping.

Whether a partner can deduct a loss depends on several things.

1) is the loss from a passive activity? then the passive activity rules will come into play to determine if the partner can deduct the loss or must wait until the partnership disposes of the activity.

2) does the partner have enough basis or is at-risk for an amount to take the loss. most of the time basis and the at-risk amounts are the same but they can be different and it is the lower of the two that determines if the loss is deductible. even with enough basis see 1) above.

if you don't understand 1) or 2) see a tax pro

TT computes neither basis or at-risk amounts.

here's a link to one worksheet that is for basis computation

there are others that are available on the web.

https://tax.thomsonreuters.com/content/dam/ewp-m/documents/tax/en/pdf/other/quickfinder-updates/qpep-march-updates_comb.pdf

easyxpressAuthor

Level 4

Thanks for the info. However, I realize the question that I posted is too generalized and hence caused the unnecessary confusion. My apology for that. Let me put down the factitious specifics to avoid miscommunication, as I am trying to convey a rather simple situation.

- 5 people put in $1,000 each to form a multi-members LLC (taxed as partnership). Let's assume this is not a passive activity for the partners.

- Year 1, the partnership has a net operating LOSS of $500. Since it is a pass-thru entity, the partnership sent out K-1 to each member/partner that reported $100 loss to each.

- The tax code states this loss ($100) cannot be recognized for the year.

- Let's assume none of the partners want to liquidate.

So what the proper way for the partner to handle this $100 loss? Should the partner keep track this loss separately (outside TurboTax) and carry it forward to future years to offset any gains?