Our LLC sold a business in 2016 but we were still on the lease through February 2019. New owners filed bankruptcy in 2018 and we ended up paying about $45,000 in back lease payments and legal fees. The LLC has wound down, so it will not be filing a return for 2019. How can I include these business expenses in my personal return?
Missing a lot of information here that leaves way to much room for wild quessing based on no facts.
So I take it this is a multi-member LLC that reports taxes on IRS Form 1065?
sold a business in 2016
What kind of business? Another single member LLC? Multi-member LLC? S-Corp? C-Corp? Something else?
but we were still on the lease through February 2019.
Lease for what? If your LLC sold a business that your LLC owned, then explain the details of how "we" were on a lease for the sold business. This sounds like a "round robin" to me. But I'm sure it's not so you need to explain.
New owners filed bankruptcy in 2018 and we ended up paying about $45,000 in back lease payments and legal fees.
As I see it, the LLC you still own paid those expenses - not "we" pesonnally.
The LLC has wound down, so it will not be filing a return for 2019.
What LLC Wound down? The one that was sold? Or the one you still own? If the latter, did you file a "final" 1065 partnership return and issue "final" K-1's to all owners in a tax year prior to 2019?
How can I include these business expenses in my personal return?
Need more details before it can be determined if you even "can" claim anything on the personal return. If the owners of the LLC are not married to each other and filing a joint tax return, this *WILL* complicate matters quite significantly, and professional help would be highly recommended for dealing with this. Especially if your state taxes personal income since that would make this a double-whammy.
Three of us were members of an LLC that owned a beauty salon and day spa filing on 1065. The other members included my daughter and another young lady. The LLC signed a lease for space in a shopping center to build out the beauty salon. My wife and I personally guaranteed the lease payments.
Our LLC sold the beauty business in June of 2016, but my wife and I were still bound by the lease guarantee through February of 2019. After the sale of the beauty business our LLC filed final taxes and K-1's at the end of 2016. But the purchasing LLC and it's members ran the business into the ground and filed bankruptcy in the fall of 2018, leaving about $50,000 in unpaid rents through February of 2019.
My wife and I personally paid the lease and legal expenses because of our guarantee. We settled for about
$35,000 in back rents and about $10,000 in legal fees. Our LLC was also named in the lawsuit, but it had wound down and filed all final returns. And my two partners didn't have any money (or burning desire) to share in the settlement.
I gather that besides the LLC signing the lease, you and your spouse personally guaranteed it
here's some support
IRS revenue ruling 67-12
Advice has been requested whether ordinary and necessary business expenses, incurred in prior
years and paid in a year subsequent to the termination of the business by an individual taxpayer,
using the cash receipts and disbursements method of accounting, may be deducted under section
162 of the Internal Revenue Code of 1954.
The taxpayer operated a business as a sole proprietor. He had incurred debts for ordinary and
necessary business expenses which he was unable to pay because of financial problems, and had
entered into an agreement with his creditors under which he would pay his debts when he was
able to obtain funds. He then discontinued his business.
In a year subsequent to the termination of his business, the taxpayer paid the debts he had
incurred while carrying on the business.
Section 162 of the Code provides, in part, for the deduction of all the ordinary and necessary
expenses paid or incurred during the taxable year in carrying on any trade or business.
Section 461(a) of the Code sets forth the general rule that the amount of any deduction or credit
allowable shall be taken for the taxable year which is the proper taxable year under the method
of accounting used in computing taxable income.
Section 1.461-1(a)(1) of the Income Tax Regulations provides that under the cash receipts and
disbursements method of accounting, amounts representing allowable deductions shall, as a
general rule, be taken into account for the taxable year in which paid.
In the instant case, expenses represented by the debts would have been deductible under section
162 of the Code had they been paid by the taxpayer while he was still carrying on the business.
The fact that the business has been discontinued does not prevent the deduction of expenses
otherwise allowable to an individual taxpayer using the cash receipts and disbursements method
of accounting. See Waters F. Burrows v. Commissioner,38 B.T.A. 236 (1938), acquiescence,
C.B. 1938-2, 5. Also, compare I.T. 4071, C.B. 1952-1, 148.
Accordingly, the ordinary and necessary expenses, incurred in a trade or business in prior years
and paid in the current taxable year, by an individual taxpayer, using the cash receipts and
disbursements method of accounting, are deductible under section 162 of the Code, even though
the business has been discontinued.
Waters F. Burrows v. Commissioner, 38 B.T.A. 236 (1938), acquiescence, C.B. 1938-2, 5. Also, compare I.T. 4071, C.B. 1952-1, 148.
Reed v. Commissioner, T.C. Memo 1986-212
Dodd. V. U.S., 62-1 USTC 9216
the unanswered issues I see for which professional advice should be obtained .
did the other two also sign personally on the lease? only if so, could the IRS could bar a deduction until you estableish that they are unable, not unwilling, to reimburse you for their share.
how should this be reported - even though the business was terminated, should a 1065 be filed and if so how should these expenses be allocated or do you merely file a schedule C and take the deduction for all thses expenses on that form?
My wife and I personally guaranteed the lease payments.
I'm no professional on this. But if you two "personally" guaranteed the payments and the payments were made "after" the business was closed, shut down, bankrupted or whatever, then the payments were not made "in the normal course of business" and would therefore not be deductible on your personal tax return at all.
But like I said, I"m no professional on that aspect. Even though I suspect a real tax pro will tell you the same thing, you should seek professional help on this in case a tax pro knows things about tax law that we don't.