Partner's loan to a partnership upon sale and dissolution

[mmarc2000]

I am a 50% partner/member in an LLC treated as a partnership.  Over time I have loaned the LLC money which the LLC has never been able to repay.  In 2019 we sold the assets of the business at a loss.  At 12/31/19 the loan balance remains outstanding and will never be repaid.  How is this treated for tax purposes (1) on the LLC return and (2) on my personal return.  Thank you.

[KarenM90]

If the business is still in existence (it has not been closed with your state/IRS) I would recommend obtaining something official (I'd recommend an attorney) saying that the company is unable to repay your loan and it will be included with your basis in the partnership. Then on the partnership books, it would become part of your member/partner equity.  Otherwise, if the business stays open, your liability will just remain as a company liability that did not go with the sale.

If the business has been or will be closed, this is basically what would happen to it without anything from an attorney as long as it was recorded correctly on the LLC books, I'm just recommending something to support your increase in basis for your personal reporting.

If the business was also closed (and your membership shares were also relinquished/sold during 2019) then you can report that as an increase in basis on your personal tax return, so your loss will be larger.  

[mmarc2000]

Thank you KarenM90.  The business was closed in 2019 when the physical assets were sold.  If I understand correctly you are suggesting the debt gets converted to equity to increase my basis and this should be documented in writing?

[AmyC]

Yes. Paper trails are always good. You just need to be able to back up your position that you did loan the company money. Since it was not repaid, it went into your basis.