How to report K-1 partnership with manually updated basis?

[tshort9]

In 2005 I initially committed to an LLC investment of $15,000 via my friend, Bob. Bob is the one who brought me into the deal, so he communicated with the partners that I was interested and they allocated $15k for me plus whatever amount Bob wanted. Due to a change in my circumstances, I had to back out of the deal, but Bob had already committed to the LLC his investment amount and my $15,000. He agreed to cover my $15k, and invested that amount in addition to the amount he had originally intended to invest. 

Over the next ten years things didn't go well for the LLC, and Bob lost most of his investment (along with the $15k he put in for me.

In 2015 the LLC opened up another round of investment with more favorable financial terms, and I again expressed my interest - this time investing $20,000 directly with the LLC. Bob also stayed in, adding new capital, and we agreed that if this new round went well, he would get the first $15k to come out of whatever gains I realized. He memorialized this agreement in an email to me, and I replied that I agreed to do this.

This time around the investment worked out well, and in 2020 the LLC had a liquidity event, paying out all investors in a combination of qualified dividends and long term capital gains. My share of gains is worth approximately $30,000, which is reflected on the K-1 I received for 2020. This form also shows in Box L my basis as $18,500, Withdrawals and Distributions of $48,500 (=18k + 30k) and my Ending Capital Account as $0.

In December of 2020 I received my distribution statement from the LLC, and was given the option to either receive a cash payment for the entire distribution amount, or roll some or all of it back into the LLC as common or preferred stock. (I'm not sure it matters, but I decided add another $20k to my investment and  roll all of it into preferred stock, raising my total investment to $68,500, not including the $15,000 that Bob put in for me back in 2005). 

In fulfillment of the agreement I had with Bob, I wrote him a check for $15,000 in December of 2020, thereby honoring our agreement, and effectively increasing my basis in the 2015 round from $20,000 to $35,000. 

I have been playing around with different ways to reflect this in TT, but so far have not figured out how to enter the numbers so that the changed basis reduces the tax due. Any suggestions on how much to enter and in which fields? Thanks for any tips. 

[ThomasM125]

First of all, you mention common and preferred stock, which would indicate that you own stock in a corporation even though you call it an LLC, which would indicate it is a partnership.

If it is a corporation, the distribution you received would normally be considered a dividend and would be taxable as such, regardless of your basis interest in the business.

If you have a partnership interest, the distribution would not normally be taxable, as you would only include in your income your share of company profits for the year.

Your basis would only affect your current year income if you received distributions in excess of it, in which case you may have capital gain income. Also, if your distributions exceeded your basis, you would not be able to deduct your share of losses of the company until your basis had been restored to a positive number.

So, you may not have to be concerned about your basis when completing your personal tax return for the current year, but you need to determine what it is and keep track of it for the day when you liquidate your interest, as it will be used to determine you taxable gain or loss on the disposition of your interest.

[tshort9]

Thank you, Thomas, for your reply. 

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@ThomasM125 wrote:

First of all, you mention common and preferred stock, which would indicate that you own stock in a corporation even though you call it an LLC, which would indicate it is a partnership.

It is an LLC - Limited Liability Corporation. It is a private corporation, not publicly traded. I am a qualified investor in it and am a limited partner in it for tax purposes (I have not operational responsibility or voting rights). 

I do believe the distribution is taxable, as the amount in Box L, Ending Capital Account on my K-1 is showing $0; and the amount on the Withdrawals and Distributions line equals the total of my opening capital balance plus the increase in value in my investment due to a combination of the appreciated value of the underlying stock plus a dividend distribution. 

So in effect my five-year-old investment in this LLC terminated at the end of 2020. I chose to participate in a new round of investment offered to me by the company, but as far as the IRS is concerned, that is a new and separate investment from the one I had in closed in 2020. 

[Rick19744]

There appear to be too many loose ends in this transaction to provide accurate detail, but here are my high level comments:

1. While your facts may use terminology typically associated with corporate entities, if you are / did receive a K-1, this entity is in fact an LLC taxed as a partnership for tax purposes.
2. If you contributed $20,000 in 2015, you should have received K-1's from 2015 through 2019.  These K-1's would have had your share of pass-through activity which impacts your tax basis schedule each year.
3. While the 2020 K-1's have a new reporting requirement, we have no clue how the LLC determined your beginning basis; which should be reflected on a tax capital basis in accordance with new regulations.  Having said that, this is a complicated area since most LLC's do not have the information to determine a member's tax capital.  Based on that, we have no idea how your LLC determined your beginning basis reflected in box L on your K-1.  However, YOU should know your tax basis as noted in comment 2.
4. If we assume that the $18,500 reflected on your K-1 is correct, then you have the following:
   1. The $30,000 gain will be reported on your personal tax return.  There is no mention of what type of gain this is, capital or ordinary, but none the less, it is taxed in 2020.
   2. This $30,000 increases your tax basis to the $48,500
   3. Your facts are not clear as to what your actual distribution was.  If it is in fact the $48,500, then you have nothing further to report.
5. Your payment to Bob, was nothing more than a repayment of a loan from Bob.  This has no impact on your investment in the LLC.  Bob was always the member.  You and Bob just had a side agreement, nothing more.
6. You indicate that you made another contribution to the LLC in the amount of $20,000.  This capital contribution increases your tax basis.
7. If you in fact contributed more, and your facts seem to indicate that you reinvested the $48,500 that was distributed to you, then your tax basis is now the $68,500.
8. Bottom line, based on loose facts, the only thing you need to report on your personal tax return is the gain of $30,000.  Once again, you don't indicate what this is; ordinary income, capital gain, where this was reported on the K-1, etc.
9. Your facts indicate that your investment is done.  Did you receive a K-1 that indicates it is the final K-1?
10. Did you in fact receive $48,500 in distributions?
11. Based on your facts, this seems to sound like this is a Series LLC.  These are fairly new and unique animals, but none the less, still taxed as a partnership.
12. Since it appears that you are investing a fair amount of $$, I believe it would be in your best interest to take all your documents to a tax professional so they can provide you with guidance.  This guidance may confirm what has been stated above, or the documents, once reviewed, may come to a different conclusion.