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dbooksta
Level 2

K-1 loss in 2-member LLC

How should amounts be displayed on K-1s for the following scenario?

 

2-member LLC, both members actively engaged in the business.  Initial filing in 2020.

 

In 2020 there was not enough income to cover expenses.  Member A covered the ($10,000) net expenses out of own pocket.  Should the K-1 for Member A list ($10,000) in both Box 1 and Box 14?  Is that all?

1 Best answer

Accepted Solutions
Rick19744
Level 12

K-1 loss in 2-member LLC

Follow-up responses:

  1. Your reply indicates "member B could have paid the expense as well".
  2. Based on that statement, I recommend member B reimburse member A for $5,000 (assuming 50/50).
  3. Then you make an adjustment to the books and records to indicate that both member A and B made a $5,000 capital contribution.  This way the equity stays in balance to the ownership.
  4. Then allocate the loss and any other separately stated items 50/50 (once again, based on item 2 assumption).
  5. Handling this in any other manner opens up potential questions and issues should you win the audit lottery.  
  6. Finally, this is not handled on Schedule C as noted in your reply.  Your K-1 items will flow through to Schedule E.
*A reminder that posts in a forum such as this do not constitute tax advice.*

View solution in original post

6 Replies
tagteam
Level 15

K-1 loss in 2-member LLC

I am going to page @Rick19744 for this.

 

However, it appears as if there would be a contribution to capital and then a special allocation to Member A.

Rick19744
Level 12

K-1 loss in 2-member LLC

Some initial thoughts: 

  • The overriding mechanics of partnership allocations is that they must either be in accordance with the very complicated substantial economic effect regulations or based on the partner's interest in the partnership (PIP).
  • There are some missing pieces of information
    • What is the intent behind Member A covering the expenses?
    • Is this a loan?  If 'yes",  this should be put into writing and a fair interest rate charged
    • Is this a capital contribution?
      • If a capital contribution, will Member A receive an increase in ownership?
  • Having a better understanding of the above will help in providing some guidance on how to complete your tax return.
  •  
*A reminder that posts in a forum such as this do not constitute tax advice.*
dbooksta
Level 2

K-1 loss in 2-member LLC

Member A merely covered the expense until 2021 income could cover it.  So I suppose it's a "capital contribution."  No change in PIP or ownership (it was not considered significant; Member B could just as well have paid the expense).

 

The LLC checks "Yes" on Schedule B Question 4 so my understanding is that capital accounts don't need to be listed on K-1.  So can the LLC just list 0 across the board on K-1s Box III, and Member A can deduct that as a loss on his Schedule C?

Rick19744
Level 12

K-1 loss in 2-member LLC

Follow-up responses:

  1. Your reply indicates "member B could have paid the expense as well".
  2. Based on that statement, I recommend member B reimburse member A for $5,000 (assuming 50/50).
  3. Then you make an adjustment to the books and records to indicate that both member A and B made a $5,000 capital contribution.  This way the equity stays in balance to the ownership.
  4. Then allocate the loss and any other separately stated items 50/50 (once again, based on item 2 assumption).
  5. Handling this in any other manner opens up potential questions and issues should you win the audit lottery.  
  6. Finally, this is not handled on Schedule C as noted in your reply.  Your K-1 items will flow through to Schedule E.
*A reminder that posts in a forum such as this do not constitute tax advice.*
Mike9241
Level 15

K-1 loss in 2-member LLC

I see another issue.  it's a question of whether member B has $5,000 of basis to take his share of the loss. if one argues that A gifted 50% of the $10K (as a capital contribution) to B. then B has no obligation to repay A. if he does, then one can argue no gift was made and B has no real basis.  this is a situation that should be discussed with a tax pro. Certainly, others can have different viewpoints. 

 

Rick19744
Level 12

K-1 loss in 2-member LLC

@Mike9241 they should be good to go following the provided guidance.

*A reminder that posts in a forum such as this do not constitute tax advice.*
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