The expenses you incurred are referred to as "start-up" costs (Section 195). In general, these are capitalized and amortized.
There is an allowance to permit a partnership to deduct up to $5,000 of start-up costs in the year the partnership begins business. The deduction is reduced for every dollar the total organizational or start-up costs exceed $50,000. Any costs that aren’t immediately deducted are amortized over 15 years.
The partnership is also allowed to deduct any unamortized start-up costs in the year the partnership terminates. Since your partnership (LLC) is terminated, you would write off these costs. You would do this on the form 4562 page 2 Part VI.
When you do this, each member will have this as a deduction on their respective K-1. They will then take this deduction on their 1040. Each contributed $5,000 (which provides basis), they now deduct the $5,000 on their return and end up with zero basis. No capital loss as there is no basis left to deduct.
Make sure the return and each K-1 is marked as final.
*A reminder that posts in a forum such as this do not constitute tax advice.
Also keep in mind the date of replies, as tax law changes.
