Final K-1 from LLC ... understanding what is capital loss, carry forward loss, etc

[RedCab]

Tagging @jtax because I saw a fantastic answer to another post about K-1 handling.

Situation:

I've already filed 2022 1040 forms and need to amend based on late arriving K-1 for an LLC that bought/sold land after making improvements. I was a passive investor.

Need some help navigating TurboTax to input correctly

3 Questions:

1. Original investment was in 2004 for $25K. In the final K-1 there is a distribution of $4K. Is there a place for me to claim a $21K capital loss?

2. The $4K distribution is a check that I'm not going to receive until next week, in 2022. I'm assuming that since it's called out on the 2021 K-1 it belongs in my 2021 taxes... but LMK if I need to hold onto that until 2022 filing.

3.  Over the years I've received an annual K-1 describing that year's (passive) business loss which has carried forward. The sum of these passive business losses is around $11K. Can I also take that? Or is that somehow already part of the $21K I calculated in question #1?

Note there was a (large) distribution in 2007 and at that time I paid taxes on that as ordinary income and got relief for the (up to that time) accumulated passive losses.

Many thanks to those that can help steer me!

[tagteam]

@jtax and also, importantly, @Rick19744 and @nexchap 

[Mike9241]

I've already filed 2022 1040 forms and need to amend based on late arriving K-1 for an LLC that bought/sold land after making improvements. I was a passive investor.

You have not filed a '22 return the current tax year is 2021 and that's the last year you could file for until 2023 when you'll be able to file your 2022 return

3 Questions:

1. Original investment was in 2004 for $25K. In the final K-1 there is a distribution of $4K. Is there a place for me to claim a $21K capital loss?  you probably do not have a $21K capital loss see below. 

2. The $4K distribution is a check that I'm not going to receive until next week, in 2022. I'm assuming that since it's called out on the 2021 K-1 it belongs in my 2021 taxes... but LMK if I need to hold onto that until 2022 filing.

3.  Over the years I've received an annual K-1 describing that year's (passive) business loss which has carried forward. The sum of these passive business losses is around $11K. Can I also take that? Or is that somehow already part of the $21K I calculated in question #1?

Note there was a (large) distribution in 2007 and at that time I paid taxes on that as ordinary income and got relief for the (up to that time) accumulated passive losses.

you need to determine your tax basis in the partnership to determine whether you have a capital loss or not. your tax basis starts out with the $25K you invested in 2004 it is increased by all items of income reported on your k-1s from 2004 to the year of your final k-1. it goes down by all losses and distributions during the same period reported on the k-1.  this is your tax basis which is different from suspended losses. 

since the partnership terminated in 2021 (final k-1) the suspended passive losses will be released. in effect they become nonpassive.       

[RedCab]

First, I'll correct my mis-stated initial statement. Should have read:   Earlier in 2022, I filed the tax year 2021 1040 forms and need to amend ....

Here's what's going on in the forms... is it correct?

Form 4797 captured the $4K returned in the end from the original $25K invested ($21K loss). This flowed to line 4 on Sch 1 as a loss.   I got this result by following the guided step by step stating it was "sold" (not "liquidated")

Sch E captured the passive losses that have accumulated up to this final year ($11K) and it flowed to line 5 on Sch 1 as a loss . This was also entered along the way in the step by step

Then lines 4 and 5 on Sch 1 were combined ($21K + $11K) and put on Form 1040 line 8 as a $33K loss.

Seem right?

Thx!

[nexchap]

@RedCab You're missing the part about the $25k no longer being your starting point.  Partnerships refer to "basis" as what you get to use when computing your final gain.  Your "basis" started at $25k.  But it changes every year, based on what is reported on the K-1.

Think about it this way:

• First, for the moment, ignoring the 2007 distribution and anything else that may have happened on your past K-1s.
• You put $25k into the partnership.  You got $4k back.  That's a very real $21k loss.  But you're telling the IRS that you lost $32k.  So that can't be right.

So the $11k losses currently on your return?  Those reduce your basis to $14k.  The losses you reported in 2007?  They reduce it further. 

To verify the final amounts on your return, do this:

1. Look at the entire partnership history from a cash standpoint.  What did you put in?  What did you get out?  That tells you what you should be paying tax on, over all filings from 2004 to 2021.
2. Then look at past filings.  How much income/loss have you already reported and paid tax on?
3. Your final return -- 2021 -- ought to plug whatever gap is left.

[Rick19744]

Currently having fun in the sun and on island time, so my response will be fairly brief.

I will just restate the most important factor that has been stated; until you know your tax basis in your investment you cannot accurately determine your gain or loss.  Doesn’t sound as if you know this figure.

A couple of questions:

• Is the k-1 marked final?  Given the distribution coming out  late in 2022 I just want to make sure you can free up your suspended losses.  I typically don’t see accrued distributions on a K-1.
• look at your k-1 and what does it show as ending capital?  
  Additionally what is that figure excluding any distribution?
• Your K-1 should be on a tax capital basis, which is not the same as your tax basis, but at least it may be close.  Since the partnership has been around for awhile not sure how they have reported your capital account in the past?  Look at an older K-1 to see what box used to be marked.

[RedCab]

Thank you @Rick19744  @nexchap and please keep in mind my questions aren't meant to be argumentative, they're just an attempt to sort out my confusion on the topic!

Ok, I think I'm seeing it now.

At the time of the 2007 distribution ( on which I paid ordinary income tax) the capital account had been reduced from my original $25K to $15K. Now in the Final K-1 I'm getting $4K back. So the total loss that will come off my 2021 taxes is $11K (= $15K minus $4K). I suppose benefit to me is it's coming off against ordinary income and not against capital gain.

Someone stated that the cumulative losses couldn't be more than the original investment. Is that really true? If the LLC made money and retained it for awhile, couldn't it eventually been lost and passed on to the LLC? Or are we saying that an LLC can never really retain money without considering it income... whatever is retained is pro-rated to the investors as income and taxed?

[nexchap]

@RedCab "whatever is retained is pro-rated to the investors as income and taxed" <-- This.

Imagine the partnership makes $5000, reporting it on the K-1.  You'd report the $5000, pay taxes on it, AND increase your basis from $25k to $30k.  Basically, any non-cash K-1 items that increase your taxes also increase your basis.  Any non-cash K-1 items that lower your taxes, lower your basis.  As for cash distributions, if you pay taxes on the distribution, it doesn't affect basis.  If you don't (e.g., some partnership distributions are treated as return of capital), they lower your basis.

In the end, the total loss you report to the IRS has to match the actual loss you experienced.  And similarly, any gain they tax should match an actual profit.

[Rick19744]

Understand you are trying to arrive at the correct answer, however, you need to determine your tax basis.  
You didn’t answer my questions, which would help get you closer to the correct figure. 
What you were told is not 100% accurate.  This is due to the fact that income passed out to you increases your tax basis.  

[RedCab]

@Rick19744 

A couple of questions:

• Is the k-1 marked final?  YES  Given the distribution coming out  late in 2022 I just want to make sure you can free up your suspended losses.  I typically don’t see accrued distributions on a K-1. 
• look at your k-1 and what does it show as ending capital?  $0
  Additionally what is that figure excluding any distribution? $4K
• Your K-1 should be on a tax capital basis, which is not the same as your tax basis, but at least it may be close.  Since the partnership has been around for awhile not sure how they have reported your capital account in the past?  Look at an older K-1 to see what box used to be marked. Not sure, the K-1 refers only to "beginning capital account" and "ending capital account", and I don't see any reference to whether it's by tax capital basis or tax basis as you referred. 

[Rick19744]

Based on your follow-up responses:

• If you have your 2018 k-1, what box is checked in your capital account section?
• In section L of your k-1, is there anything on the other increase / decrease line?  If so, what does the description say in the attachment?  I’m checking to see if there is anything that says “final k-1 adjustment “ or similar language.
• If bullet 2 is a “no”, and your capital account has been maintained on a tax basis, then your facts are indicating no gain or loss upon disposition.
• Keep in mind, you are still freeing up your suspended losses, but those will be reflected elsewhere on your 1040.
• If no gain or loss on disposition, you will show $4,000 as proceeds on form 8949 and $4,000 as basis to net to zero.
• I’m a little bothered by the fact that you received a k-1 that indicates final yet you haven’t received all distributions.  This is bothersome because if the actual $$ amount of the final distribution isn’t the $4,000, then your return will need to be amended.

[RedCab]

• @rick 
•  
• If you have your 2018 k-1, what box is checked in your capital account section? Tax Basis
• In section L of your k-1, is there anything on the other increase / decrease line?  If so, what does the description say in the attachment?  I’m checking to see if there is anything that says “final k-1 adjustment “ or similar language. On the 2021 FINAL K-1 there isn't any entry on the increase/decrease line. In previous years it has decreased.  On 2021's there is a current year net income loss.
• If bullet 2 is a “no”, and your capital account has been maintained on a tax basis, then your facts are indicating no gain or loss upon disposition. 
• Keep in mind, you are still freeing up your suspended losses, but those will be reflected elsewhere on your 1040.  OK... which form will those be reflected on? It looks like TT has put them on form 8582, feeding into Sch E and eventually Sch 1, then 1040 line 8.
• If no gain or loss on disposition, you will show $4,000 as proceeds on form 8949 and $4,000 as basis to net to zero. Got it, net zero capital gain/loss.
• I’m a little bothered by the fact that you received a k-1 that indicates final yet you haven’t received all distributions.  This is bothersome because if the actual $$ amount of the final distribution isn’t the $4,000, then your return will need to be amended. They said the final check is in the mail, so I won't file this amendment until the amount is confirmed.

[Rick19744]

Since tax basis was previously marked I think you are good to go.  No gain or loss on final disposition and TT will handle the suspended losses as long as you indicate the activity is final.

Good move to wait to file until you receive the final distribution.

[RedCab]

@Rick19744 @nexchap @Mike9241 @tagteam 

Hi Folks, I sat down today to finalize and submit the amended taxes based on the final K-1 I received (described above).

The Fed taxes look good... thanks for the guidance.

On my California taxes it appears that my carryforward of past year's business losses (I was a passive LLC member and just received the final 2021 K-1) are being negated which seems odd.  

Can any one of you confirm that is the proper Calif treatment?  Essentially no business losses are allowed according to how it's currently entered in TT. (Seems hard to believe).

Thank you once again!