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SeattleDrzl
Level 2

loan from an LLC member to an LLC

my business partner and I both made loans of equal amounts to our LLC  to purchase computer equipment necessary for the business. For a while business was good and we were able to get a small portion of our loans repaid (with interest) however things got bad and eventually the company failed and the equipment became worthless.

 

Question: on my personal tax filing can I treat the unpaid portion of the loan as business related bad debt and claim it as ordinary losses? If so , do I have to claim the full amount the year the LLC got dissolved or I can carry part of it forward?

11 Replies
Mike9241
Level 15

loan from an LLC member to an LLC

assuming the entire amount of the loans went to purchase equipment, you get no write-off for the loans. what you can write off is the remaining tax basis of the equipment, if any. have you been filing partnership returns?

  

here's an example that might clarify why the loans aren't a write off

you (invest) loan the LLC $50. which gives you $50 of tax basis. 

the LLC buys $50 worth of equipment. this has no effect on your tax basis

you take $50 of depreciation on the equipment. this reduces your tax basis to $0. so no further write-off is available. if only $40 of depreciation was taken and the equipment is worthless, the remaining $10 could be written off.  in either case, you put in $50 and took write-offs of $50 

 

you have to determine your tax basis in the LLC. if it's greater than $0 then it has something that has a tax basis greater than $0. if it's worthless it can be written off and the loss passes through to you on the k-1 for the partnership return. if somehow there is a negative basis, you wrote off more than was allowed. see a tax pro.

if you have not been filing partnership returns, consult a tax pro. penalties for failure to file can be as much as $5,000 for each return not filed.

SeattleDrzl
Level 2

loan from an LLC member to an LLC

Thanks for your input.

Yes we filed partnership returns. 

From your answer, I guess a capital investment and a loan are treated the same?

Is it because we loaned the money to the LLC that we own?

Would it be different if we have lent to an LLC that we did not own? 

 

I am asking because We had an initial capital investment in the LLC that we used to purchase equipment. Then we needed extra funds so we made a loan to the LLC. Those extra funds went into infrastructure, operations and additional equipment.

 

 

 

tagteam
Level 15

loan from an LLC member to an LLC


@SeattleDrzl wrote:

.....I guess a capital investment and a loan are treated the same?


Capital contributions and loans are treated differently.

 

See https://www.thetaxadviser.com/issues/2018/oct/loans-members-llcs.html

SeattleDrzl
Level 2

loan from an LLC member to an LLC

I read that article, it leads you believe that the bad debt can be claimed as an ordinary loss.

 

What am I missing?

tagteam
Level 15

loan from an LLC member to an LLC

You are not missing anything except that there is an inside basis and an outside basis.

 

Read @Mike9241's post again.

 

Does the LLC still own the equipment? Was the equipment sold to a third party or distributed to the members? Was the equipment scrapped? 

SeattleDrzl
Level 2

loan from an LLC member to an LLC

the equipment is scrapped

tagteam
Level 15

loan from an LLC member to an LLC

If the LLC now owns nothing (i.e., equipment, et al) and has been dissolved with no distributions to the members, then you need to calculate your basis. 

 

To the extent you have basis, you have a realized loss which you can recognize on your return. 

SeattleDrzl
Level 2

loan from an LLC member to an LLC

So all this is captured in the K1?

tagteam
Level 15

loan from an LLC member to an LLC

You need all of your K-1s (unless you have this documented elsewhere) to calculate your basis.

 

Your basis is increased and decreased by certain items (see link below for list).

 

https://www.irs.gov/publications/p541#en_US_202102_publink1000104288

 

 

A basis worksheet is available at the link below.

 

https://www.irs.gov/pub/irs-pdf/i1065sk1.pdf

Mike9241
Level 15

loan from an LLC member to an LLC

Thanks for your input.

Yes we filed partnership returns.

From your answer, I guess a capital investment and a loan are treated the same? from a tax standpoint there's not really a difference between a capital contribution and a loan in regards to an LLC. 

HERE'S A LINK TO A PARTNERSHIP BASIS COMPUTATION WORKSHEET

https://tax.thomsonreuters.com/content/dam/ewp-m/documents/tax/en/pdf/other/quickfinder-updates/qpep... 

 

Is it because we loaned the money to the LLC that we own? yes

Would it be different if we have lent to an LLC that we did not own? IN SUCH A SITUATION WHICH IS NOT THE CASE HERE THERE WOULD BE A SUBSTANTIAL DIFFERNCE IN THE TAX TREATMENT OF UNCOLLECTIBLE LOANS BECAUSE LOSSES OF THAT LLC WOULD NOT REDUCE YOUR BASIS IN THE LOANS SIMPLY BECAUSE YOU ARE NOT A PARTNER (OWNER) BUT A LENDER. THUS A NON-BUSINESS BAD DEBT 

 

I am asking because We had an initial capital investment in the LLC that we used to purchase equipment. Then we needed extra funds so we made a loan to the LLC. Those extra funds went into infrastructure, operations and additional equipment.   AS NOTED ABOVE THIS IS ONE LLC TO WHICH YOU ORIGINALLY MADE AN INVESTMENT AND THEN BECAUSE IT NEEDED MORE MONEY MADE A LOAN WHICH WAS REALLY AN ADDITIONAL INVESTMENT.

 

 

IN YOUR SITUATION THERE WOULD SEEM TO BE NO DIFFERENCE BETWEEN INSIDE AND OUTSIDE BASIS. 

IN ANY CASE, SINCE IT SEEMS NO PROPERTY WAS CONTRIBUTED ONLY CASH IN THE FORM OF INVESTMENT AND LOANS, YOUR BASIS IS THE ORIGINAL AMOUNT INVESTED + ANY ADDITIONAL AMOUNT INVESTED + LOANS - DISTRIBUTIONS - LOAN REPAYMENTS - LOSSES.  

 

IF WE WERE TO LOOK AT THE BALANCE SHEET ASSUMING ALL ASSETS WERE EXPENSED OR DISTRIBUTED (ASSET DISTRIBUTIONS OTHER THAN CASH CAN HAVE TAX ISSUES)  WE WOULD LIKELY SEE PAGE 5 COLUMN D TOTAL ASSETS = $0 AND COLUMN D LINE 19A IN THE AMOUNT OF X

AND LINE 21 (X) -X SO THAT LINE 22 WOULD ALSO BE $0

SeattleDrzl
Level 2

loan from an LLC member to an LLC

Thank you so much I appreciate your help and the clear explanation. 

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