K1 partnership liquidation - partnership cost basis

[Stigma2021]

Hello

I received a final K1 from an investment I made 5 years ago. I was a limited llc - domestic partner with a small % portion. My capital investment was all cash of 25K. Every year Section L of K1 was getting smaller (losses) and 13W field had a small 200 fee for management expenses. Those were the only fields with info. Now on this final K1 my % capital ending is NONE (J section) , my L section has beginning capital of 15K and current year loss -15K meaning ending cap is 0. Also 9a field - net long term  cap loss is 24800 with 13W other deduction 200.

Now in the turbo tax I entered K1, entered my latest % (with 0% for ending cap). Selected complete dissolution and selected a liquidated partnership. entered starting and ending dates and now arrived at the sale information.

I entered Sale price as 0

Selling expense as 0

Partnership basis 25000 ? Or 15000

Ordinary gain 0

1250 gain 0

Basically this was investment into a startup. For now it's worthless and this is a final K1. I only invested initially. Did not add any capital but filed K1s every year as it went down. 

So what is my basis and I am assuming I my ordinary gains are 0 as well as sale expenses and sale price . 

Thank you 

Thank you 

[M-MTax]

All of what you posted is your INSIDE basis....your capital account....you need to know your OUTSIDE basis to compute your gain or loss.

[Rick19744]

As @M-MTax noted, you need to determine your tax basis in your investment (outside basis).

Prior to 2019, the K-1 would indicate what method the Section L represented; tax basis, 704(b) basis, GAAP, other, etc.  The 2019 K-1 makes no note of that.  The reason is that the IRS wants all K-1's (for partnerships) to be presented on a tax basis.  There was an outcry and the IRS acquiesced allowing a different presentation; but only for a year.  

So you either need to find out if your Section L was presented on the tax basis OR determine this yourself; which I would recommend you do anyway.  On many occasions, Section L is forced to zero through an adjustment on either the income / loss line or withdrawal / distribution line.  So you need to be careful.

Your tax basis begins with your initial capital contribution and is updated annually for the applicable items in Part III of the K-1.  Hopefully you maintained all prior K-1's so you can determine this amount.  Unless you know your tax basis, you will not be able to compute your overall gain or loss.

Once you know your tax basis, this information will need to be reported on form 8949 which will then flow to Sch D on your 1040.

Your tax basis is your "cost basis" on form 8949 and your liquidating distribution is your selling price.  Make sure that you do not reduce your tax basis by the liquidating distribution when reporting on form 8949.  

[Stigma2021]

@Rick19744  @M-MTax Thank you for quick response. Trying to get it done by tomorrow.

So I looked at previous K1s and they are GAAP  in Section L.

how do I go about calculating my partnership basis. I thought if i invest 25K and have 0 left my partnership cost basis is 25K. Its my whole investment OR is it 25K minus professional fees (yearly account management) minus other things.

 Final K1 

2019

PART2

section L - beginning capital account               15K

                   current year increase (decrease)    -15K  (minus)

       ending capital account BLANK but i am assuming its 0

PART 3

9a net long term gain (loss)      -24800 loss    (my original 25K)

13W - 200 

========================================

2018 GAAP

PART 2

section L -                           beginning capital  15.2K

                  current year increase (decrease)    -200  (minus)   - in add'l pages its says its management fees

                                         ending capital account 15K

PART3

13W - STMT 

  =======================================  

.....................

....................

....................

2015 GAAP  - MY FIRST K1 

PART 2

section L -                           beginning capital  NONE

                                               capital contributed during the year  25K      <- NOT my partnership cost basis?

                                                current year increase (decrease)    -3K  (minus)   

                                                                    ending capital account  22K

PART 3

           13 K    - 77

             20     - 77

....

....

....

Basically every year is a decrease. Now how is that basis calculated

keep in mind Part III of K1 IN ALL YEARS only has 13 K or W and sometimes 20.  No info in 1 or 2 or 3 (its not a business / rental....). Hedge fund investment for a private company via llc

[Anonymous]

capital contributed during the year 25K <- NOT my partnership cost basis?  why do you think not?  that's what you say you invested.

GAAP is meaningless.  you say you invested $25,000 that should be your initial cost basis unless you can explain why it isn't.  based on what you provided there is a reduction of this by $77 for the 13K item in 2015 (box 20 is merely an explanation of 13W). I assume nothing in Part III for 2016-2017.  then a further reduction of $200 for the 13W item in 2018. that leaves you with an at-risk amount of ($25,000-$77-$200) or $24723 at the beginning of 2019.  9a is reporting a loss of $24,800 and 13W is reporting a deduction of $200, your at-risk amount appears to be $24723 so you need to complete form 6198 for the partnership. your deductible losses for 2019 are limited to your at-risk amount.  thus you have 0 basis for purposes of computing gain or loss on disposition of the partnership. 

[Stigma2021]

Thank you @Anonymous  - does it look ok below

Took my initial investment AND subtracted Part III field 13 values (deductions) over the years (from 2015-2019) and got to the 9a field(net-long cap gain/loss) number on the Final K1. 

Found more paperwork Schedule NJK-1 (came with final K1) and saw that Part2 fields 1 and 4 (distributive Share of partnership income (loss) is equal to 9a in the Final K1 (which equals to my initial investment - all the deductions of field 13 through the years)

So distributive Share of partnership income (loss)   is my    Partnership Basis (in turbotax)   CORRECT?

Sale Price  = 0  correct? since my ending capital section L (of final K1) is blank (or 0) (start cap - cap loss = 0 on final k1)

selling expense = 0      no expenses charged to me stemming from the action of liquidation 

ordinary gain  = 0         no gains of any type capital or ordinary from this sale

1250 gain  -   0               there was nothing sold or sold assets prior to liquidation. 

there are fields for AMT gain loss

partnership basis = automatically filled amounts from above 

ordinary gains = 0 

1250 gains   = 0

-------------------

in the end after entering data above, Turbotax takes my partnership basis loss amount (init investment - deductions in my case) and adds it to the Capital Loss Carryover I noticed.

[Rick19744]

At a quick review of the additional detail, I agree with @Anonymous in that you have no tax basis.

Based on this, if you did not receive any liquidating distribution, then your selling price is zero and your tax basis (cost) is zero, which results in no gain or loss on this investment.

That is what should be reported and if you determine something different after filing your 2019 tax return it can always be amended.  However, not sure you will have a different result, unless of course the facts change.

[Stigma2021]

I am a little confused by tax basis being zero if its referring / equal to my initial investment (-minus yearly deductions fees aka professional fess).

I make a cash investment and it gets liquidated YET you cant write it off as loss. Its not like I get cash back from a write off but rather it gets added to a Capital Loss Carryover which only allows me to deduct 3000 per year anyways.

What am I not seeing OR I might be completely not understanding (i am a newbie at this) something?

If I am "not receiving liquidating distribution" my tax basis is zero. What is there to distribute when LLC is being liquidated because its all written off UNLESS it means EACH year i filed K1 I was actually writing it off as my capital loss?  btw I double checked previous years and this investment was a nonpassive income 0 so I dont think i writing anything off.   UNLESS I need to get some sort of add'l letter / confirmation that there was a liquidating distribution of 0 dollars to allow me to write it off?!?!?

thank you for your patience guys

[Rick19744]

So here is the deal.  The tax law only allows write-offs (deductions) to the extent an investor has economic loss; this is known as at-risk in the tax world.

You invested $25,000.  Then @Anonymous explained how he arrives at your tax basis as follows:

Capital contribution $25,000

less $77 loss taken (on your personal tax return) in 2015 gives you tax basis of $24,923

Appears nothing impacted your tax basis in 2016 and 2017.

In 2018 there was a loss taken (once again on your personal tax return)  in the amount of $200 which gives you a tax basis of $24,723.

At this point you are not able to take any additional losses in excess of the $24,723; as this is your tax basis at the end of 2018.

The losses reported in 2019 are $24,800 and $200.  This exceeds your tax basis, so you are only able to take $24,723 on your tax return.

This shows that while you made a $25,000 investment, your are getting the benefit of $25,000 in deductions on your tax return.  Your tax basis has reached zero and you have no more economic skin in the game.

[gordonwd5]

I left my Better Investing stock club in August 2021 after being in it for 10 years.

The club paid me off with three stocks. AAPL, Comcast, and Visa.

The club sent the stocks to my Charles Schwab account.

My Schwab account shows the cost basis of when the club bought the stocks.

The club sent me the info of how I was paid for my shares of the club.

On the club form it show me my cost basis for what I'm responsible for, which is a lot less then what is showing from the report from Schwab. 

So I put in my cost basis in turbo tax, but how do I tell the IRS that it is less than what Schwab sent them.

Pleas Help. I talk to the club treasurer and he said that it is no problem, but couldn't tell me how to do it.

My Email is [email address removed] 

I was not happy that they paid me off in stock, but it was what they wanted to do.

[DianeW777]

You do not need to tell the IRS why the cost basis is less than your Form 1099-B or your Schwab account. When you enter the cost basis in TurboTax the gain or loss will be determined accurately. The IRS, if there is any question, will reach out to you once the documents are reconciled with the tax return.  This process can take up to two years. I really don't think there will be any question, especially if the net result is a gain.

[gordonwd5]

Thanks for the fast reply, BUT

What about my cost basis is higher than what Schwab reported.

EX: Apple cost basis from the club was $838 and my member's adj-cost basis is $3,583

That is a difference of $2,745 different in my capital gain to be taxed.

I think the IRS will want to know why.

[MarilynG1]

Reporting a (higher) Adjusted Cost Basis is very common; the IRS sees it a lot (especially with employee stock sales). 

Save documentation of what you actually paid for your shares, just in case!

[gordonwd5]

Thanks, but I just want to make sure the IRS understand it.

I would like to show my pay out from the stock club to the IRS.

BY using Turbo Tax. How can I show it in Turbo Tax?

IS the a spot in Turbo Tax that I can put that in?

I'm hoping that Schwab can show it in the tax form that they send into the IRS.

[RobertB4444]

@gordonwd5  You have been told how to do this a couple of times in the best way.  At this point contacting the IRS by mail is going to take a very long time to process. 

But if you insist then you will efile your tax return and then print out form 8453 and check the box for form 8949 or equivalent and then attach your documentation verifying your basis adjustment.  Mail this in after you efile the return.