Sold my 50% share of LLC to my business partner (brother) at end of 2021.

[HeyNow1]

Membership Interest Purchase Agreement says purchase price was $50,000.  In my capital account at the time (Dec 11, 2021) was $53,275.  That capital account figure has accounted within it any liabilities and guaranteed payments, etc.  My brother started paying via monthly installments in 2022.  

I'd hired an accountant to do my 2021 taxes but only recently discovered she did them wrong and they weren't accepted by the IRS, and then she basically disappeared on me, so my 2021 taxes are not even considered filed yet.  Not knowing that, I filed my 2022 taxes but without including anything about the LLC or the purchase of my LLC interest, so I want to be sure I include the entire purchase of my LLC interest in the 2021 personal taxes that I'm trying to do now, as one amount.

The K1 that I'd received from the LLC's CPA did NOT show my K1 as final, and showed me STILL at 50% for the share of profit, loss and capital at end of year, and it showed my capital account at the end of the year, which was $55,685.  

In TurboTax 2021, it looks like they only use Form 4797 (instead of Form 8949 with Schedule D), but this is a problem because it looks like only on Form 8949 and Schedule D can you do the adjustment for the purchaser being my relative (code "L", followed by the adjustment amount that would make the final Gain or Loss = "0").  

In TurboTax 2021, there is a screen that says at the top:  "Enter Sale Information" 

"Using your Schedule K-1 and other supporting documents, enter the information below about your sale of [the business]." 

Under that it says:

"Regular Gain or Loss", and under that it says:

"Sale Price" (I put $50,000)

"Selling Expense" (should I enter all the legal fees I had to pay to have a lawyer negotiate the purchase agreement?)

"Partnership Basis" (I'm assuming this should be the amount in my capital account as of the date of the purchase agreement, which was $53,275.....right?)

"Ordinary Gain" (this should be 0, correct?  Not $-3,275?)

"1250 Gain" (this I should leave blank, correct?  Since this is only about real estate or something?)

[tagteam]

I am going to page @Rick19744, but a couple of threshold questions.

* Did you pay any tax liability due for the 2021 tax year (it is understood that the return was not accepted)?

** Is it the case that you did not include any payments on your 2022 return?

[HeyNow1]

Hi @tagteam!  To answer your questions:

* Did you pay any tax liability due for the 2021 tax year (it is understood that the return was not accepted)?  No.

** Is it the case that you did not include any payments on your 2022 return?  Not for the federal, but for one state (new for 2022) I paid in full the small amount due, and I got on a payment plan for the other state where I reside (1st payment is coming up in Aug).  

Also I'm looking in the background forms of TurboTax and it looks like now I can see there is a Form 8949 and Schedule D, however the adjustment field (and adjustment code field) is blank, and TurboTax doesn't allow you to edit those fields.  Only reason I'd edit those fields is to add code "L", followed by the adjustment amount that would make the final Gain or Loss = "0" (per the Schedule D instructions saying that, because I sold my membership interest to my relative, I have to use code "L" and zero out the loss).

In the Personal -> Personal Income section of my 2021 TurboTax, in Investment Income, the Capital Loss Carryover shows $-275.  When I click on that (to show more info), a window pops up that says:

"Capital Loss Carryover. 

This summary shows how your capital losses will be used to reduce your income this year.  It also shows any remaining loss that will be carried forward to next year. 

Capital Loss Carryover from 2020 = $0     

Net Capital Gain/(Loss) in 2021 = $0     

Capital Loss Applied in 2021 = $-275     

Capital Loss Carried to 2022 = $-275  "

I see that that's because the difference between the sale price $50,000 and the amount in my capital account at moment of sale Dec 11, 2021 $53,275 was $-3,275, and (per another info window that popped up in TurboTax) "you can have a capital loss carryover if your net capital loss is more than $3,000.  That means you can carry over any net losses that are greater than $3,000 to future tax returns, until the loss is completely written off."

My lawyer said in Dec 2021 I should contact him because I'd get a good tax break from this separation, but from the looks of the IRS rules that that isn't possible, and I don't want to pay him $1,000 just to find out I might be able to get $275 off my taxes (and then find out that's not even correct), you know what I mean?  I already paid $7,350 for that lawyer's help to separate myself from my brother's business, and earlier in the year another $4,568 to another lawyer to try and protect myself from some shady business stuff my own brother was trying to do against me.   Any benefit to including that total of $10,938 in legal expenses to the field "Selling Expense" in the "Enter Sale Information" section?

[tagteam]

@HeyNow1 

This will not be a total solution, but you can get an "L" code on Form 8949 as per the checkmarks in the screenshot below.

[Rick19744]

Partnership tax gets complicated very quickly; about as fast as the acceleration of a Tesla.  There are many questions that are not addressed, and unfortunately, a forum such as this is not conducive in these types of situations.

• While you may not want to use a tax professional to handle your taxes, I am going to strongly suggest that you reconsider.  Your 2021 tax return is late, there could be penalties, interest, late filing, etc.  Don't be penny wise and pound foolish here.  Find a professional you are comfortable with, and have them handle this making sure that 2022 is correct when it is amended for the sale impact.
• You don't indicate whether the whole purchase price was received in 2022.  This impacts whether the sale is an installment sale.
• As a partner in an LLC taxed as a partnership, you should be maintaining your tax basis.  This figure is key in determining your overall gain or loss on the sale.  The capital account figure on the K-1 may be close, but I would not generally rely on this figure to equal your outside tax basis.
• You could have Section 751 recharacterization (hot assets) depending on the assets held by the LLC.  This will impact the character of the gain; it won't change the overall gain or loss, just a reallocation of capital vs ordinary.
• You should ask the individual preparing the LLC tax return if you will receive a final K-1 in 2022 or why the 2021 K-1 was not marked as final.  You need to make sure that you have all the facts when preparing your personal tax return(s).  The preparer of the LLC return may be treating this as a redemption, and as such, the final K-1 will be indicated in the year the final sales price (installment payment) is paid.
• Not pretty, but that is the partnership tax world.  

[tagteam]

I agree with @Rick19744, 100%, @HeyNow1; you will almost inevitably compound your problems by trying to rectify this scenario yourself. 

You should absolutely consult with a local tax professional.

[Mike9241]

I not sure of any tax break. 267 (a)(4) bars losses between relate parties.  your loss, before any limitation, would seem to be even more than the $3000. $50000 less selling expenses less basis.

267(a)In general
(1)Deduction for losses disallowed
No deduction shall be allowed in respect of any loss from the sale or exchange of property, directly or indirectly, between persons specified in any of the paragraphs of subsection (b)

(b)Relationships
The persons referred to in subsection (a) are:
(1)Members of a family, as defined in subsection (c)(4)

(c)Constructive ownership of stock
For purposes of determining, in applying subsection (b), the ownership of stock—
(4)The family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants; 

**********************

PLR-111089-00

The section 267 constructive ownership rules for stock are extended to partnership interests by section 267(e)(3), which provides, in relevant part, that for purposes of determining ownership of a capital interest or profits
interest of a partnership, the principles of section 267(c) (the stock constructive
ownership rules) shall apply

you don't mention what the other lines of the k-1 show but for the year of sale a prorated amount of profit or loss should have been reflected on the k-1 either using the per share per day or specific cutoff methods.  also, a final return should have been filed for 2021. There can't be a one-person partnership. the IRS requires that there be interest included with the installment payments which are reportable in the year received.  finally, the k-1 still shows you as a partner. this will be in conflict with your 2021 and 2022 returns.  even though it was an installment sale you ceased being a partner/memeber on the ate you old regardless of the installment sale. 

[Rick19744]

As stated previously, there are just too many questions to be able to properly address the situation:

• Since there is no communication between the two parties, we have no idea if another individual was brought in.
• Even if no one else was brought in, if the preparer is handling this as a "retiring partner", the partnership continues until the final liquidating distribution is made.  Hence the previous comment on whether the OP received all the proceeds in 2022.  There could be a 2022 K-1 indicating "final".
• Once again, get some professional help so that you can get the answers to open questions, and file accurate returns on your part.

[HeyNow1]

I appreciate everyone's thoughtful answers.  My brother started paying via monthly installments in Jan 2022 $1,443 at the end of each month. 

He hasn't taken on any new partners as far as I know, and I want him to continue the business and do well.  I wish the best for him, but not through me and my wife getting further financially/emotionally destroyed, you know what I mean?

About penalties and interest for the 2021 taxes, the accountant who bailed on us had said over the phone (of course not in writing) that she would explain everything to the IRS and that she'd send a screenshot of the filing confirmation she received, and then later said she sent the screenshot to my wife, which my wife never received.  The accountant then said she was in the hospital and couldn't talk more, which at the time I believed her, and she's been ducking my calls and emails and texts ever since.  

Regarding me not being able to take a deduction because he's my brother, I suppose it doesn't even matter in the end what my selling expenses were, if it all adjusts to zero anyway?  

Also it was my understanding that we can put the entire sales price in the tax return of the year of sale, instead of doing it in installments.  If it all zeroes out, then what difference would it make?  I figure if I do it as one lump sum (even though I haven't received the full amount yet), then I won't need to amend my 2022 taxes which don't even mention the LLC.