How to reflect zeroed capital accounts in final return for LLC?

[res94025]

I am filing a final return for an LLC that has never had any income or depreciation.  Original capital accounts for three partners totaled $50,000.  There was no cash to distribute at closure.  How do I reflect this on the 1065 Schedule M-2?  Do I decrease the accounts to 0.00 on Line 7 (other decreases)?  If so, what is the itemization language for "capital account loss at business closure"?  Or ... does the balance on Line 9 (balance at end of year) remain at $50,000 and the partners claim the loss individually on their returns?  Thanks in advance for any help!

[Rick19744 · Accepted solution]

I would recommend that you zero it out on line 7 and indicate "final return adjustment".

The capital loss is then taken at the member level.  This is not reflected on the Form 1065 at all.

[res94025]

Perfect.  That's what I expected but wanted another opinion.  Much appreciated!

[Rick19744]

Although as I rethink this, did you not just distribute this back out to the members?

[res94025]

No.  There were no funds to return to members.  The LLC was formed to take an option on a technology.  The initial capital contribution covered the cost of the option, which ultimately expired.  So there is no capital to return to members and also no equity in the technology.  Members want to be able to write off the loss of their contributions, so are thinking the capital accounts need to be adjusted to show the loss on the 1065.

[Rick19744]

Well that changes my response.  Since you actually acquired "property" at the LLC level you now have a loss at the LLC level (not the member level).  This loss will be short term or long term depending on how long the option was held.

This loss will be reported on the Form 1065, Schedule K and respective K-1's.  This loss will then be passed through to each member on their K-1.

This will then zero out the capital accounts through recognizing the loss at the entity level.

[res94025]

Ah ... great.  Thank you!  So the loss is reported on the 1065 and the capital accounts are depleted with a loss entry on Line 3 of Schedule M-2.  Yes?  And the loss would be considered as occurring with the expiration of the option, not the option entry date, right?  Thanks for your help!

[Rick19744]

You would need to report the loss on form 8949, which then flows to Sch D and then Schedule K lines 8 or 9 as applicable.  This then will also flow through to Sch M-2 line 3 which means Sch M-2 line 9 should then be zero.

This will also flow to the respective K-1 line and this is where each member will be able to recognize the loss on their respective 1040.

Sale date is on the option expiration date and purchase date is when you acquired the option.

[jpmcclen58]

If I might add to the discussion, because I have a very similar issue:  I'm using Turbotax Business and I don't see any access to Form 8949 or M-2.  How do I acquire these forms or are they in here somewhere that I'm not seeing?

Thanks

[PatriciaV]

@jpmcclen58
Yes, you can access all related forms for a Business tax return by using the Forms icon on the right side of the header of TurboTax Business.

1. Click on the Forms icon.
2. When you see the list of Forms in My Return, click on "Open Form" and enter the form number. If you have that form in your return already, it will open in the large window. Otherwise, you will be asked to add that form to your return.

Schedule M-2 appears on page 5 of Form 1065. Not all businesses are required to complete this schedule.

Form 8949 is automatically generated when you have entries on Schedule D (Capital Gains and Losses).

You can also access all IRS forms from this website: IRS Forms and Publications