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dcrshell
New Member

LLC loan payoff that creates a distribution in excess of partner basis on a passive activity.

I have had an LLC interest for years that has given me passive losses in the past. I have had a positive basis as of 1-1-21due to a recourse loan of amount that was more than the passive losses accumulated through then. In 2021 they paid the loan back to me which created a distribution in excess of partner basis. Does the loan payoff cause taxable income even though the previous losses were passive losses that haven't been recognized? 

2 Replies
Mike9241
Level 15

LLC loan payoff that creates a distribution in excess of partner basis on a passive activity.

as of 1-1-21due to a recourse loan of amount that was more than the passive losses accumulated through then. In 2021 they paid the loan back to me which created a distribution in excess of partner basis. Does the loan payoff cause taxable income even though the previous losses were passive losses that haven't been recognized? 

 

 

those loans are included in your tax basis. once your capital a/c is reduced to zero losses reduce your tax basis in the loan. therefore, repayment of that loan could result in taxable income yet those passive losses would not be freed up because the loan repayment income is not passive.

 

what you need to do is determine your basis in the partnership.

this year I believe that the IRS required schedule L to be reported on the tax basis if it wasn't already. but that schedule does not take into account loans a partner makes to a partnership.

 

 

this is a worksheet for computing tax basis  - look at line 15 

1) Adjusted basis from preceding year (enter zero if this is the first tax year in whichthe taxpayer is a member of the partnership). (Line 1 cannot be less than zero.)

 
2) Gain (if any) recognized this year on contribution of property to partnership (otherthan gain from transfer of liabilities)  
3) Cash contributed during the year   
4) Adjusted basis of property contributed during the year (reduced by the amount ofliabilities to which the property is subject, but not below zero)  
5) Items of income or gain this year including tax-exempt income: (add  additional lines if needed)  
a) Ordinary Income 
b) Interest Income 
c)
d) )
Add lines 5a through 5d
6) Partner’s share of partnership liabilities (current-year item K, Schedule K-1)  
7) Liabilities from prior year included in line 1 above—enter as a negative number  
😎 Other increases to basis including excess depletion deductions over basis of depletable property  
9) Add lines 1 through 8 (if less than zero, enter zero).  
10) Withdrawals and distributions during the year (for property other than money, enteradjusted basis of the property). If amount is greater than line 9, enter amount on line9. Excess may be taxable. Enter as positive number  
11) Items of deduction this year including nondeductible expenses and any  
deduction for oil and gas percentage depletion (also include carryforward
amounts from prior years):( add addtuional lines if needed )
a) Section 179 Deduction 
b) Meals 
c) 
d)
Add lines 11a through 11d
12) Add lines 10 and 11  
13) Subtract line 12 from line 9. (If less than zero, enter zero.).  
14) Items of loss this year (also include losses not deducted in prior years due to thepartnership interest basis limitation):  
b) 
c) 
d) 
Add lines 14a through 14d
15) Adjusted basis of partnership interest (line 13 minus line 14). (If less than zero, enterzero.) The deductible loss for the year is equal to the lesser of line 13 or line 14  
16) Allocation of loss to be carried forward—allocate amounts from line 11 and line 14  
a)
b) 
c)
d) 
Add lines 16a through 16d. Carry this amount to next year
17) At-risk adjustment: Combine lines 1, 2, 3, 4, 6 and 7  
18) Enter line 10 as a negative number  
19) Enter as a negative number any nonrecourse loans, amounts protected againstloss by guarantee or stop-loss agreements and nonrecourse liabilities on propertycontributed to the partnership. Do not include “qualified” nonrecourse financing asdefined in IRC Sec. 465(b)(6)  
20) Enter as a positive number the fair market value (FMV) of partner’s personalproperty not used in the partnership that secures a nonrecourse loan taken as anegative on line 19  
21) Combine lines 17 through 20. If negative, no current-year loss can be deducted.  
Note: Form 6198 must be completed if there is an entry on line 19 above.  

 

dcrshell
New Member

LLC loan payoff that creates a distribution in excess of partner basis on a passive activity.

Thanks for the worksheet. They did include a basis worksheet, but is shorter than what you sent. It shows a distribution in excess of partner basis of XXXXX. But it seems like the fact that I have not deducted the losses yet, should not work against me. If the loan wasn't included in my basis in the past, those losses would not have been allowed at the at-risk level, before they got to the passive loss level. So no income would be recognized there either, but as XXXXX of at risk carryforward. So just because they have been considered passive in the past instead of at-risk carryovers, I have to recognize this big gains? I can see basically recapture the losses that made my basis a loss disregarded the loan, if I have taken them as non-passive, but because I haven't recognized them, it doesn't seem right. Don't get me wrong, I know "doesn't seem right" means nothing. Turbotax just says this excess distribution "maybe" taxable. 

I will work out your worksheet you sent and see how it comes out. All these different rules gets confusing of how they interact.

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