Abandonment of Partnership? Form to use?

[mrh84]

In 2024 my husband was a partner in a corp, and put $3k startup cash in during 2024. He "abandoned the partnership" in the same year by removing himself from the company. This was done formally through lawyers.  He was given $2k of the $3k startup investment back. So it would be a $1k loss on investment. He should get a schedule K-1? And report it in turbotax under investment losses, per sect 165(a)?

Can you please help me figure out what this would be categorized as, and where I would put it within turbotax. Thank you so much for your help! I am so stuck!

[PatriciaV]

It depends. If this was a partnership or S-Corp, all partners should receive Schedule K-1 no matter how long they were invested in the company. 

In the case of a partner leaving a partnership, you have two options: 1) submit a request for extension to file so you can wait for the eventual K-1 or 2) file now and amend later if necessary. 

For the second option, you would set up the partnership under Business Income >> Schedules K-1 (even though you don't have one yet).

1. Enter the partnership information and indicate this was a final K-1. 
2. Report that you "sold" your investment as a complete liquidation.
3. Enter no income or expense (nothing for K-1 boxes).
4. When the program asks about the sale, enter the reimbursement he received as the sales proceeds and the initial investment as the remaining basis. 
5. This will report a short-term capital loss (because he held it for less than a year) on Form 4797.

C-Corps, however, do not send K-1s to their investors. If your husband purchased stock and later sold the stock at a loss, this activity would be reported in TurboTax under Stock, Crypto, Mutual Funds, etc. as the "sale" of stock at a loss.

[mrh84]

Thank you! This is very helpful. He bought and sold stock, but it was purchased and sold for the same amount ($26.00), so no gain or loss. I assume that doesn't need to be reported then, correct? Also, if it is a C-Corp instead of an S-Corp, do I complete it the same way as outlined above, just knowing we won't receive a K-1? Or is it completed differently?

Thank you!

[RobertB4444]

You do need to report all of your stock sales even the ones that have no gain or loss.  The IRS doesn't always know whether there is a gain or loss unless you tell them.

If it was an investment in a C-Corp then there is no K-1.  C-Corps don't issue them.  So you would just report the loss as a sale of stock in the C-corp where he paid $1000 for the shares and sold them for zero dollars.

@mrh84 

[mrh84]

So it seems like it's a C Corp, and we're double checking on it to make sure. Assuming it is a C Corp, I have another clarifying question: the $1k loss was all through cash investment. He put 3k in as startup and got 2k back when he left. That part wasn't in stock; just startup cash. There was a separate $26 stock purchase and sale. So I'll do $26 in stock purchase and sale. But does the $1k get reported in that as well, even though it was cash and not specifically for stock? Or does that get reported through the business income section as outlined in the 1st response to my original post (as if it was on a K-1 form)? I just want to make sure I enter this properly. I appreciate the help!

[DaveF1006]

I suggest reporting this as an investment loss. You can report it like a stock sale but when reporting, classify it as other when you categorize it. 

When you report it, report it with a $3K basis and report the proceeds as $2K leaving a $1K capital loss.