Hi Josh and Rick, I had a similar situation with a different twist.
I have never been a capital contributor to one of my LLC's (TN-member-managed) but I did own an equity stake (sweat equity). For the first two years our former CPA was allowing me to share in the losses of the company according to my sweat equity percentage (less than 5%).
At the same time the company was paying me a Guaranteed Payment for my work with the company and they were attributing losses to my share percentage in Box 1. This offset about 1/3rd of my guaranteed payments in box 4 so my reported Self Employment Earnings in Box 14 A were only 2/3rds my guaranteed payment. This substantially reduced my tax obligation on the guaranteed payment - nice.
Then a new CPA decided to do what Rick said above and stopped allocating any loss to me which made my Box 14 Self Employment Earnings equal to my Guaranteed Payments. My personal tax liability went up...
I am assuming the LLC can allocate losses any way it chooses as long as the "substantial economic effect" rule is maintained. The losses allocated to me were less than 5% of the total losses (we were not profitable yet) so the "substantial economic effect" was allocated to the other 95% of people who had capital in the game.
The new CPA is arguing differently...
Thoughts on that situation?
