Multi-Member LLC K1 Schedules

[kmm91]

Hello -

Situation:

I was part of a 3 members LLC in 2023, the business (tobacco retail) is a complete loss and did not generate any income. the capital was covered by 2 members (capital total was 50K), covered by myself and one of the partners. The third member did not pay anything, and was in charge of getting labor covered. now the business has been closed, we filed for S-corp because we wanted to hire people and we did not, nor the IRS replied to the S-corp form filing. Business ran for 4 months without generating any revenues.

Complication: 

One of the members who covered 50% of the capital is saying he does not want to get a K1 schedule . The third member did not incur any profits or losses so his K1 entries will be all zeroes. As far as the operating agreement concerned, it is 33.33% per partner (equal distribution) but I guess now we are in agreement to remove one of the partners, and the third partner won't make a difference for him given the fact that he did not incur any losses or profits.

Question:

Is it possible to only request one K1 schedule for myself claiming what I paid and that is 25K  when filing the Business taxes? 

Thank You !

[Mike9241]

all we can tell you are the rules. you filed to be an S-corp and if it was approved you operated as an Scorp and a return must be filed. with 3 members the penalties for failure to file could be about $200/per month/per member/ for each month late up to 12 months.  for a full year that's about $7,000. 

for an scorp there are two choices for allocating income and expenses

When it comes to allocating income or loss in an S-Corporation (S-Corp), there are specific methods used to distribute the financial results among shareholders. Let’s explore these methods:

      Per Share Per Day Method:

• Under this approach, S-Corps allocate income or loss based on a day-weighted average. Shareholders take their ownership percentage for each day of the year and multiply it by that day’s share of the annual income or

• Closing of the Books Election

  This election effectively splits the tax year into two periods: one ending on the date x is no longer a shareholder and the other for the remainder of the year.
  • With this approach, the Company prepares two separate income statements for the year, which are then used to allocate income to the shareholders.
  • This method is useful when income is not evenly distributed throughout the year. For instance, if the company  lost most of its income during a specific season (e.g., fall), this method ensures fairness by not allocating taxable loss to X after they were no longer a shareholder.

his CPA is telling him he can claim the losses somehow because he owns another business - not my business if that is legal or not ! ). I won't comment on the legality of what his CPA is doing. That is not your problem. It could be his and his CPAs. you need to look to your legal responsibilities in filing a proper S-Corp tax return.  If the IRS sees issues, you'll be the first to be contacted if you are signing the return. Then the iRS will probably turn its attention to the others. 

Consider that you are preparing and signing the return under penalties of perjury, "I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct, and complete." 

the other problem I see is trying to do a return that balances 

if your agreement stated that each owned a 1/3 then there were 3 shareholders just that 1 had a zero basis in his stock. 

for further advice contact a lawyer or tax pro,