How to enter investment loss if no Final K-1 is issued due to bankruptcy?

[fvargas]

I invested $60K in a startup LLC in July 2020 and it filed Chapter 11 bankruptcy in January 2024. They incurred losses each year – ($6727) in 2020, ($6505) in 2021, and ($2884) in 2022. They said they will not issue the 2023 K-1 nor the “Final K-1” for 2024 (please don’t respond saying they have to, because they won’t – the company is dissolved and won’t spend the money). Additionally, I was misinformed about passive carryover losses and did not check the appropriate box in 2021 and 2022 stating “I have passive activity losses carried over from last year".

1. Is it necessary to amend my 2021 and 2022 tax returns to capture the passive activity losses if I am going to have to write off the full $60K due to bankruptcy anyway? Also, I cannot finish my carryovers anyway since I will not have the final two years of K-1s.
2. How do I handle my 2023 tax return if no K-1 received? I do not have the numbers to continue calculating my basis nor enter the passive carryover losses. I also cannot check the box that the company dissolved as it did NOT dissolve in 2023. Do I just file my tax return without a K-1?
3. How do I enter the investment loss on my upcoming 2024 return with no “Final K-1”? I am walking through the 2023 wizard steps just to see what to expect next year. I see there is a box that should say “This partnership ended in 2024.” Once I check that box, it looks like I then check “Disposition was not via a sale” on the next screen. Then when proceed to next screen it asks for the purchase date and sale date. There was no sale per my previous response, so I suppose I enter the bankruptcy filing date? Then, when I keep going through the wizard it starts asking me K-1 questions – Box 1 Ordinary Loss for the year, then “what boxes are checked on your K-1”, etc. There is never a spot to say I didn’t get a K-1 and I will not be getting one. Surely there is an alternative way to file this investment loss and be done with it.

I would be so very appreciative if you could number your answers to coordinate with the questions. I know it is a lot and I am trying to keep it easy to follow.

@PatriciaV&  @RSUMan - hoping you can weigh in here as you have both helped me with my K-1 issues and provided knowledgable answers that stand out from the crowd. I would be so grateful for your help.

[Mike9241]

First I think the IRS could challenge any write-off in 2023 because the bankruptcy didn't take place until 2024 (even that does not mean an entity is totally worthless which is what the IRS requires).  if you do take the loss in 2023  you might have to prove to the IRS that the investment was totally worthless (not worth even a dime)  at the end of 2023. i

1. Is it necessary to amend my 2021 and 2022 tax returns to capture the passive activity losses if I am going to have to write off the full $60K due to bankruptcy anyway? Also, I cannot finish my carryovers anyway since I will not have the final two years of K-1s. NO the losses reported are what they are. The question you'll have to follow up on is whether you deducted those passive losses when you shouldn't have. SEE BELOW

1. How do I handle my 2023 tax return if no K-1 received? I do not have the numbers to continue calculating my basis nor enter the passive carryover losses. I also cannot check the box that the company dissolved as it did NOT dissolve in 2023. Do I just file my tax return without a K-1?

if you are going to take the write-off in 2023, you would enter nothing for boxes 1-20. You would indicate final k-1 and that you disposed of your entire interest. see below about entering the PAL c/o. if you are going to wait until 2024 just leave the k-1 boxes 1-20 blank but do enter the PAL c/o for 2023

1. How do I enter the investment loss on my upcoming 2024 return with no “Final K-1”? I am walking through the 2023 wizard steps just to see what to expect next year. I see there is a box that should say “This partnership ended in 2024.” Once I check that box, it looks like I then check “Disposition was not via a sale” on the next screen. Then when proceed to next screen it asks for the purchase date and sale date. There was no sale per my previous response, so I suppose I enter the bankruptcy filing date? Then, when I keep going through the wizard it starts asking me K-1 questions – Box 1 Ordinary Loss for the year, then “what boxes are checked on your K-1”, etc. There is never a spot to say I didn’t get a K-1 and I will not be getting one. Surely there is an alternative way to file this investment loss and be done with it

look at the 2023 form 8582 to see if it shows a passive loss carryover. It would appear on line 1c or 2c

if these are blank you'll need to go back to the same form for each year.  it is possible some or all of the losses were allowed look at part VIII column (c)  for the allowed amount. Any carryforward would be in column (b). Turbotax should have carried forward that loss to the subsequent year where the calculations would be repeated to determine allowed and carryforward loss. If there is no 8582 for a year this would seem to indicate the loss was not treated as passive. if that's the case then you need to amend those returns. 

With the Turbotax k-1 for the year you're going to take the write-off there's a link to a disposal worksheet.  sales price would be 0. cost or basis would be your investment - less those losses less any distributions received for those years. Without proof that you are entitled to an ordinary loss the remaining basis will be a long-term capital loss.  also if you took those losses when you shouldn't and are amending prior returns to eliminate those losses as you go through the 2023 k-1 questions there will be a place to enter the passive loss c/o which will be allowed in the year you declare the write-off due to total disposal.

[fvargas]

Thank you, @Mike9241. Appreciate you replying. 

A few things to clarify: 

• I am not sure why you thought I might take the writeoff in 2023...the bankruptcy wasn't until 2024 and point #3 in the intro is titled "How do I enter the investment loss on my upcoming 2024 return..."
• You said: "NO the losses reported are what they are. The question you'll have to follow up on is whether you deducted those passive losses when you shouldn't have. SEE BELOW". Hmmm this statement doesn't make sense to me. I already said I did NOT check the box in 2021 and 2022 stating “I have passive activity losses carried over from last year". So, I couldn't have deducted them. Also, I wouldn't have anyway as they are passive activity losses and I do not have passive income to offset them against. I would only deduct them when I completely dispose of the passive activity, so 2024 in my case, since that is when the bankruptcy occurred. I was just asking if I need to go back and record my passive losses since I did not originally and therefore, they were not carried over. I was trying to see if I could not do the amendments and just take the full $60K writeoff in 2024. Probably not. 
• You say to look at form 8582 to see if it shows a passive loss carryover - I cannot do that because I have to amend the returns 1st since I did not record them originally. There are absolutely passive loss carryovers. The ones I mentioned in the intro paragraph. Those are the losses I would enter on the 2021 & 2022 amendments, if I needed to amend them, which is what I was asking. 
• Can you relook at question # 2? Your answers is based off me writing off the investment in 2023, which I am not doing until 2024.

With these clarifications, I imagine most of your responses might be different. Appreciate your efforts.

[fvargas]

@PatriciaV  - Would you be so kind as to give your insight on these 3 questions? Also, if I upgrade to the Turbo Tax Live version, is it possible to request specific experts, like yourself? I upgraded to the TurboTax Live version a couple of years ago, but the Expert I was assigned wasn't real sure how to handle my situation, so it didn't help much.

[RSUMan]

The bankruptcy filing occurred in 2024.

You have been informed by company or bankruptcy officials that no Final K-1 will be issued.

You purchased a security (an interest in the LLC) for $60,000; I am not clear as to whether you took any losses against that basis and reduced it.  I am going to assume you did not recognize any losses.

Thus, in 2024 you are holding worthless security with a basis of $60,000.

A security that becomes wholly worthless during the tax year is treated as though sold on the last day of the year.

There is a checkbox in the Schedule D dialogues for "This was a worthless security" that appears after you enter the security as Stock (non employee); Long term noncovered; date acquired, date sold (12/31/2024), zero Proceeds, and $60,000 Basis.