Microventure's K-1 Form

[erika45220]

     I have had Microventures '500 Startup fund'  for 6 years, each year, they sent me K-1 form with interest and capital gains they had never distributed to me, I have to pay tax for those money I have never received.  I've asked them to either distribute the interest and capital gain or remove those amount from my K-1, they refused to correct do anything. 

   I feels like they are just shifting tax liability to me.

  Should I discuss this with IRS and ask them to take a look at their business and decide if they should pay tax for the interest and capital gains they have never distributed to me?

   What should I do?

   Thank you.

[Rick19744]

Someone should have explained to you how passthrough entities work; both S corp and partnerships (and LLC's taxed as a partnership).

These entities do not pay tax (a few exceptions).  The income, loss, gains, losses are reported to the shareholder's or partner's (owners) on the K-1.  The owners then report the results of the K-1 on their respective form 1040 and either pay the necessary tax or reap the benefit of the losses.

For the reason above, these type of entities have a single level of tax.  Typically, passthrough entities pass out a distribution that is estimated to cover any tax liability of the owner.  This amount will be reported on the K-1.  

These type of entities are attempting to run a business, and like all businesses, need cash to keep the business going, pay salaries, rent, inventory, etc.  So it is not possible to invest in a business and expect the business to pay out all the earnings.

Bottom line, how this is reported is exactly how it should be reported.  If you are not happy with the investment, you should look into selling the investment.  Keep in mind, that the income you are reporting from your K-1, increases your basis in the investment.  This is key as when you sell the investment, you are calculating gain on a larger amount than you initially invested.  Hopefully you have been tracking your basis.

You don't indicate what type of entity, and I will assume it is a partnership K-1.  Take a look at your K-1 line 19A to see if anything is reflected on that line.  If the business is generating income they typically, as stated above, distribute out enough cash to help with any tax consequences.  If they are not doing this, then ask them when they expect to reach a point of making distributions.  If you are not comfortable with their response, consider selling. 

[erika45220]

Hi, Rick19744:   

   Thank you for your answer.

   You are right, it is an LLC, I am a Limited Partner.

   The K1 reported interest X  at box 5 and capital gains Y at box 9a, and deductions Z  at box 13,  there's nothing at box 19, I think at least they should distribute (X + Y - Z) to me, but they never distribute me anything for years.

    So I end up paying tax for the money I have never received, for years, is this legit? I can't see other LLC member's K-1 and I am not sure if other LLC members are getting any distribution, and they never provide any statement to me.

   The worst part is that, I can't sell it, I can't even exit it with a total loss.

Erika

[Rick19744]

In the real world, the LLC (most LLC's) would determine an estimated tax rate and make a distribution based on that.
So, if the LLC passed out $500 in K-1 income or gain and determined that they would use a 40% federal and state tax rate, they would then distribute out $200 to cover the tax impact.  The $200 would be reported on line 19A.
Make sure you understand how your tax basis works here as this will be extremely important when you exit this investment.  Better to get this done now instead of many additional years down the road.
As a real simple example of the impact here; initial investment $100, income over the years $400 and no distributions.  Your tax basis is now $500 and not the $100.  This makes a significant impact when sold.

[TomYoung]

Just to close the loop here...

IF the LLC does ever make a distribution of cash to you that distribution is NOT "income".  That distribution instead serves to REDUCE your basis in the investment.  To follow on Rick19744's example, if the LLC had distributed over the years $275, then your tax basis would be $225.  

You should be seeing your changing basis in Part II of the Schedule K-1 that you receive each year.

[Rick19744]

Agree.  Your distribution will not be considered income as long as your tax basis is positive AFTER being reduced by the distribution.
Part II of your K-1 will only be meaningful to you if the Section L is marked "tax basis".  

[erika45220]

Hi, All:

   Thank you so much for the answers.

   I will discuss the interest and capital gains he put in my K-1 forms, he should at least distribute some money to me to cover the tax I've paid all these years.

   I do find my Section L has 'tax basis' checked, with 'Ending capital account' value: 9000$, I guess it means if I dispose this investment totally, I mean just give up this investment so I will never receive K-1 in future, my capital loss will be '9000$', am I right?

   It is a really a good lesson learned here.

Erika

[Rick19744]

Sorry for the delay as I have been out of town.
Your K-1 reflecting tax basis is good, but it would be a good idea for you to prepare your own tax basis so you can double check the accuracy of this figure as this is an important calculation.
When you do dispose of the investment, I would hope you would get a distribution but do not have sufficient details or information about the investment.
When you do dispose of the investment you do look to the value of your tax basis in determining your overall gain or loss.  Using the K-1 figure can be tricky as sometimes the preparer of the return will include a balancing figure to get the ending amount to zero.
So in the final year, you will need to look at the amounts that are included in the current increase/decrease line AND the withdrawals/distributions line.  If there is anything included in either of those lines that represents a balancing adjustment you will need to adjust your tax basis accordingly in determining your overall gain or loss on the investment.