How to deduct expenses related to LLC that closed last year?

[Still-Learning---]

We were partners in an LLC that closed last year. This year we paid a settlement to the landlord for breaking the lease (we had signed a personal guarantee for the lease). There were legal fees related to this settlement. Also, we paid our partner's share of the settlement and he is repaying us monthly with a personal loan.

How do we deduct the settlement amount and associated legal fees and how do we report the principal and interest repaid to us by the other partner?

[Carl]

I myself can't help. But you need to specify what form you filed for this LLC last year. It "sounds" like a partnership, indicating that you filed a 1065 for the business.

[Still-Learning---]

I'm not sure what forms were filed for the business; we received a final K-1 from the LLC's accountant.

[Rick19744 · Accepted solution]

You will treat your share of the settlement and legal fees "as if" you had made a capital contribution to the LLC.  Since you already determined your final gain or loss last year, when you received your final K-1", these expenses essentially become capital losses; short term.

For the portion that you paid related to your partner, you have made a loan to them.  The interest is reported just as any other interest and there is no tax implications related to the principal repayment.

Make sure you have a written loan agreement with a stated interest rate to protect yourself.