I am an employee of an LLC who issued equity incentives in the form of 'accelerated incentive units' (AIUs). The AIUs act as units of ownership in a partnership of a similarly named holding company. Each year, I receive a W-2 from 'Company LLC' due to my employment, and I receive a K-1 from 'Holding Company LLC' due to the granted AIU equity. Each time new equity is granted, an 83(b) election is filed. I am classified as a 'limited partner or other LLC member' on my K1s, and I have not provided any capital to the partnership in the form of money or property.
In 2021, the partnership ended because 'Holding Company LLC' elected to be taxed as a corporation instead of a partnership. As a result, the AIUs have been converted into shares, and the K1 that I received is marked Final K1.
So far, I have four years of K1s:
The first two K1s were blank.
The third year K1 from 2020 listed:
This ordinary business loss was mostly carried over as 'at-risk carryover loss' into 2021.
The fourth year Final K1 lists:
The sum of the ordinary business losses from 2020 and 2021 are nearly equal to the 2021 long-term capital gain. Equity holders were informed that everything should null out and result in a net zero tax implication, but received no further tax guidance.
Question 1:
Due to >500 hours of work each year at 'Company LLC', am I considered a material participant in 'Holdings Company LLC' for which I receive my K1? How can I make this determination? Company LLC will not provide guidance.
Question 2a:
Since this is the final K1 and my AIUs have been converted to shares, how do I describe my partnership disposal in TurboTax?
Question 2b:
If the answer to Question 2 is 'Complete disposition', what is the disposition type?
Question 3a:
If I select that I am a material participant OR I select complete disposition. My tax burden goes significantly down. I believe this is occurring because TurboTax is deducting the full ordinary business loss from my income, and adding the full long-term capital gains to my Schedule D. Even though the of ordinary loss deduction is equal in amount to the long-term capital gain additions, the tax rates differ significantly, and therefore the final tax burden changes. Is this the correct treatment?
Question 3b:
If I select that I am not a material participant OR I do not select complete disposition, my tax burden goes significantly up. I believe this is occurring because TurboTax is disallowing the ordinary business loss deduction against my income, but adding the long-term capital gains to my Schedule D. Is this the correct tax treatment?
Question 3c:
If neither 3a nor 3b are the correct tax treatment, what should I do?
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