LLC bankruptcy and claiming the loss of investment

[Mr_T]

I invested 40K (purchased membership units) in an LLC in 2007 which declared bankruptcy in 2016.  Over the life of the business I did not receive any disbursements nor did I have any active role in the management of the business.

In researching this it seems the investment would be accounted for similar to a stock purchase that ended up worthless.  It would be shown as an investment sale for $0 minus the initial investment resulting in a capital loss.  The deduction would then be $3,000 in 2016 (no other capital gains) with the rest spread out over subsequent years.  Am I missing anything or misunderstanding the situation?  Please advise if so as I would prefer to take the loss over a few years as opposed to spread out over 10+ years.    Thanks!

[Anonymous]

was your 2016 return extended? if not the date for filing an amended return to claim the loss in that year has passed.  It needed to be filed by 4/15/2020.   this brings up the issue that if you can't file an amended return for 2016 can you claim losses in 2017 and forward.  also did the LLC ever report any losses or income that would affect the deductible amount.  losses shown on the K-1 that should have been reported reduce the $40K while any income that was reported increases the $40K.  I would suggest use of a pro. 

[Rick19744]

I agree with @Anonymous in that you should seek a tax professional to assist in this matter where you can have a one on one discussion.

Having said that, there are a number of issues that need to be addressed:

1. As a member in an LLC, which I am assuming was taxed as a partnership, you should have been receiving a K-1 each year; 2007 through ?
2. As a member in an LLC, you should have been maintaining your tax basis in this investment.  This begins with your initial capital contribution and is adjusted each year for the applicable items on your K-1.  Unless you know your tax basis, you cannot determine your overall gain or loss.
3. Did you receive a 2016 K-1?
4. Was your 2016 K-1 marked final?
5. What has transpired from 2016 until now?  Declaring bankruptcy does not always translate into an immediate loss.  What is key is if and when you received a final K-1 for this LLC and / or based on your facts you can support a loss.  You may not have received any final K-1 if the LLC did not have funds to pay someone to prepare the tax return.
6. You need to claim the loss in the year the loss was incurred.  You don't have any choice in this.  What you need to determine, is when did you have a loss.  If it was truly in 2016, based on your facts (which we don't know all of the facts), you may not be able to amend your 2016 tax return.  This would be a significant issue for you.
7. As you can see, there are many issues in which you need to obtain assistance from a tax professional.

[jsavo]

Hello,

I have the same situation, except that the LLC is currently filing for bankruptcy.  Since the proceedings are ongoing, the LLC sent me a message stating that they will not be issuing K-1's anytime soon.  They did provide an estimate of my allocated loss.

So, since the bankruptcy is not concluded, I assume that I have nothing to report on my current tax filing (for 2022 tax year) and I wait for "final K-1" to start the loss claim on my next year (2023) taxes ?

Thanks for a helpful forum,

[GeorgeM777]

Yes, that's correct.  If the LLC has filed under Chapter 7 of the Bankruptcy Code, then there will be a complete liquidation of the LLC, and you should receive a final Schedule K-1 reflecting your allocable loss, among other things.  If the LLC's plan is to reorganize after the bankruptcy is concluded, then you should still receive a Schedule K-1 reflecting the information you will need to include on your tax return.  If there are any statements included with your Schedule K-1, you will want to keep those because such documents may contain useful information about what you need to include on your tax return.  

@jsavo 

[jsavo]

Thank you for the quick and helpful info !