Terminated a sole proprietor LLC in 2022. Capital contributions resulted in negative equity. How do I report this negative equity?

[RobertB4444]

Capital contributions and negative equity are balance sheet entries.  You'll enter that into the final year balance sheet and then that will wrap up the business.  The negative equity won't have any effect on your income or expenses for the year.

@concisa 

[concisa]

Thanks a lot, Robert...

If I understood your answer correctly... that means the capital invested in the business cannot be used as losses?  As opposed to losses I'd have incurred if it were a corporation rather than a LLP?

Putting it another way >>

The balance sheet shows the negative equity. If it were a positive equity, it would be distributed to the sole proprietor as dividend, because it is negative, it is not distributed.

Am I understanding this correctly?

Thanks

Armando

[MaryK4]

Yes... you will recognize the losses when you completely dispose of your interest in the business.  Until then, they are only on the books, @concisa 

[concisa]

Thanks Mary,

Exactly that is my question.... How to accomplish this? Where and how to do that?

Here is the scenario: I'm using TurboTax... 

1. I've indicate on Sch C that the business was terminated.

2. I was expecting TT to continue on with questions related to the termination such as "is there a loss or a gain", how was it distributed"... things of that nature.

3. And then present based on the step-by-step questionnaire, create a form (which one: 4797, Sch D, Sch E, Sch C?) and add either gains or losses to the 1040, 1040SR or Sch 1. 

4. And of course, calculate losses limitations, if any.

TT is not doing anything like that.  So I fear TT has failed me.

What do I do?

Armando

[AliciaP1 · Accepted solution]

Schedule C losses are recognized each year with the operations of the business.  When you mark to terminate the business, you will still enter the income and expenses for the year.  Since you made capital contributions and still ended up with negative equity, your net earnings for the year should show the loss.  Also, you need to "dispose" of any assets you were using in the business and switch them back to personal use or record the sale if you sold them.  Once you have done all this, TurboTax will deduct your allowable loss from your other earned income.

To mark a business asset changed to personal use in TurboTax Online you can follow these steps:

1. Within your tax return use the magnifying glass icon to search for Schedule C
2. Click the Jump to link
3. Click Edit or Review for the line of work the asset is under
4. Scroll to and click Edit for Assets
5. Click Yes on the Do you want to go directly to your asset summary? screen
6. Click Edit for the asset you need to change
7. Continue through the questions until you get to the Tell Us More About This Asset / Large Purchase screen
8. Check the This item was sold... line 
9. Make sure any other boxes are checked as they should be and Continue through the questions for this asset
10. Repeat the steps for any other assets on your Asset Summary screen
11. Proceed entering/reviewing your return

@concisa 

[concisa]

Thanks a lot, Alicia for the comprehensive explanation.

In other words...  All moneys contributed to the LLP have already been expensed on schedule C.  Therefore, there are no remaining losses to report.

Does that simplification captures the it?

Thanks again, Alicia.

Armando

[PattiF · Accepted solution]

Yes, there are no remaining losses to report with the termination of your LLC. As @AliciaP1 detailed before, the expenses were handled yearly and there are none to report for this year unless you had a business loss for 2022 from income and expenses.

@concisa 

[concisa]

Thanks a lot, Patif