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Level 2

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

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?

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Accepted Solutions
Level 15

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

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.

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10 Replies
Level 15

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

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.

View solution in original post

Level 2

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

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
Not applicable

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

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... 

 

Level 15

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


@easyxpress wrote:

From the code, it says: “A partner will NEVER recognize a LOSS on a current distribution”.


As @Anonymous indicated, you are conflating a loss with a distribution; they are separate and distinct. Both serve to reduce your basis in the partnership and you need to keep track of them outside of TurboTax (the program does not keep track of your basis).

 

Also, as @Anonymous mentioned, you really do need guidance from a tax professional. Please seek that guidance.

 

 

Level 2

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

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?

-  

Anonymous
Not applicable

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

" Let's assume this is not a passive activity for the partners.   

- The tax code states this loss ($100) cannot be recognized for the year."  WHERE DO YOU SEE THIS ANYWHERE IN THE CODE OR REGULATIONS? CITE THE CODE SECTION OR THE REG!

 

 

THERE IS NO SUCH RULE IN THE CODE OR REGS UNLESS A PARTNER DOES NOT MATERIALLY PARTICIPATE WHICH FOR HIM/HER WOULD MAKE IT A PASSIVE ACTIVITY!!!!!!!!!!!!!!!!!!!!!!!!!!!!

 

if each of the partner's materially participates and it is a non-real-estate-rental activity then the $100 loss would be allowed to each because 1) they materially participate 2) it's not a real estate rental activity so those rules do not come into play 3) they are at-risk/have basis to take the loss

read IRS PUB 925 for what constitutes material participation.  if they don't materially participate it becomes a passive loss which would not be currently deductible. TT would track the suspended losses assuming each partner uses TT. 

 

https://www.irs.gov/pub/irs-pdf/p925.pdf 

 

 

The exception to material participation would be if this was an oil or gas venture.  then it would have to be a working interest in an oil or gas well. 

Level 2

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

WHERE DO YOU SEE THIS ANYWHERE IN THE CODE OR REGULATIONS? 

This is the tax code referenced: 26 U.S. Code Section 731 (a)(2). Specifically, it says: "loss shall not be recognized to such partner, except that upon a distribution in liquidation of a partner’s interest in a partnership etc".  This is the website used: https://www.law.cornell.edu/uscode/text/26/731.

 

From this tax section, 731(a)(1) is about the gain shall not be recognized and 731(a)(2) is about the loss. If gain shall not be recognized (but will need to lower the partner's basis in the partnership or until the basis is zero), I am assuming the loss shouldn't be recognized either, and hence my earlier question of how to handle such loss properly.

 

I had read this tax codes (few levels up) and don't see there's a way to recognize such loss except in liquidation of a partner's interest.

 

 

Anonymous
Not applicable

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

section 731 is for 

recognition of gain or loss on distribution (cash or property given to a partner by the partnership)

you do not understand the difference between a loss from operations and a distribution. They are different and I won't attempt to explain the difference again.  READ MY ORIGINAL POST. 

 

an ordinary loss from operations is not a distribution and therefore is not subject to section 731.  If you still don't understand or disagree see a tax pro where for a fee he or she can try to explain it to you and will tell you what I've posted.   

 

the applicable code section for recognizing gain/loss is code section 702.

 

Level 15

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


@easyxpress wrote:

I had read this tax codes (few levels up) and don't see there's a way to recognize such loss except in liquidation of a partner's interest.


You have to read (carefully) the posts by @Anonymous with respect to distributions and material participation, the latter of which you have presumed existed in your hypothetical. 

 

That being the case, a loss can be recognized assuming the partner has sufficient basis.

Level 2

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

After further reading on the tax codes as mentioned, a light bulb went off in my head. I indeed was confused about the partnership operating gain/loss with distribution. I thought they were the same but they were actually different kinds of animals, and that's the problem. So now I rest my case.

 

Many thanks for all the info and helps here, truly appreciated.

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