Hope not everyone is gone yet....

[Gretel]

Didn't really know how to phrase my question and I am somewhat lost.

My client A is also partner in B and C. C was created in 2008, no capital contributed and has unpaid bills in the amount of $40,000 resulting from expenses paid by A and B (not recorded as expenses). If I file C's 1065 on cash basis it shows pretty much zero income.

However, if I file accrual basis then there will be a loss of $40,000. I doubt that this loss can be taken since there is no basis. The liabilities don't look like recourse liabilities to me, even if they were structured as loans since it's impossible to take yourself to court. Maybe it is different for moneys spent by B?

Maybe, I don't even asked the right questions, I feel sooooo lost. Filed an extension but am concerned everyone is goofing off and nobody left to help me.

[Snaggletooth]

Going to Tough

...to give a decent answer not knowing any more about this situation.

For example, some of the $40,000 in expenses might be START-UP expenses and not deductible in 2008, but instead amortized over a period of time. I suspect most of these expenses could easily fall into that category.

Also appears the partners are not setting up the company accounting to handle its own affairs, but haven't read deep enough into their situation to conclude that.

[kaimana]

Is the business in question a cash or accrual basis business?kaimana

[Gretel]

Thanks, Snag and Kaimana. I do appreciate your effort.

Since the biz is just starting out it's our choice to file cash or accrual. I couldn't sleep half the night because I couldn't let go. That the owner thought he could deduct all the losses or will be able to deduct them in the future just came up when he came in that afternoon to pick up his tax returns. I will outline below what came to mind and a little more detail about the situation.

There are more members involved than I have stated, I just tried to keep it simple. Here we go again.

LLC A started biz (Motorcyle Rally with the intent to donate remaining income to local hospital but they paid far too much for entertainers) with 4 members B, C, D, E. None of them contributed any capital. E left after some months and did not pay any expenses for A. B and C are also 50/50 members in LLC Z. Lets forget about D here. He does his own taxes.

B and C personally, plus LLC Z paid expenses (none of them start up, just a small amount for formation of A) on behalf of A, mainly put on credit cards. Even the credit card charges for LLC Z are solely the responsibility of B. All expenses were invoiced to A, even the personal ones with the expectation to get paid back after the rally.

Roughly $10,000 expenses were covered by income the remainder to a tune of $40,000 is pretty much known to be down the pipe. They are looking for ways to write this off. They will have another rally this year (think they learned from their mistakes and will make profit this year).

Here are my thoughts:

1. B, C and LLC Z could have loaned money to A, then they would have losses, basis and be at risk and losses could have been taken. I don't think paying expenses personally or through another biz could be structured as loans after the fact.

2. If we file on accrual basis, knowing already A/P is worthless, I don't think we could even use them as expenses and even if we could, and don't think any of them would be at risk since they can hardly go after themselves.

3. A could change their operating agreement to include clause that members have to pay expenses by themselves, making B&C eligible to claim these expenses on pg. 2 Sch E. I think they are out of luck for expenses paid by LLC Z (even though B is responsible for all of the credit card debt taken out for A). Or is there a way that both of the member of LLC Z (B&C) could be construct to have paid the expenses personally and therefor, could take for A? I don't think so.

One more thing, also in general. If no capital is contributed and no basis exists when company goes under with losses, there are no losses available as a capital loss either, right?

I will gladly wait for any response, if it takes time to clear the mind again from tax season. Thank you so much.

Gretel

[equinecpa]

If I'm following this correctly...the bills have been paid personally but are an LLC expense. I would not hesitate to claim them in the LLC. I would journal entry them in to the books as capital contributions/expenses. Why would you consider them loans?

And can we really forget about partner D here....doesn't what you do in the LLC affect him (even if he does his own taxes?) Or is it that these partners don't want D to get a deduction for the expenses that they have footed?

Carolyn

[Gretel]

If I'm following this correctly...the bills have been paid personally but are an LLC expense. I would not hesitate to claim them in the LLC. I would journal entry them in to the books as capital contributions/expenses. Why would you consider them loans?

And can we really forget about partner D here....doesn't what you do in the LLC affect him (even if he does his own taxes?) Or is it that these partners don't want D to get a deduction for the expenses that they have footed?

Thanks, Carolyn. Last thing first. With forgetting about him I only meant not putting him and his other biz into the equation for discussion purposes.

I see your point regarding loans vs. capital contributions and if each paid an equal amount of expenses, that would be a way to do it. I hesitate to claim the expenses as capital contribution because they don't reflect their equal ownership, also expenses paid by Z LLC cannot possibly be looked at as capital contribution, or is my mind just to narrow?

[kaimana]

what is each partners share (%) in the business. I would show capital for whomever paid the bills and if their agreement is they all share income/expense by % anyone that didn't contribute still gets their (%) of expenses. I don't like the idea of deciding after the fact who does what...the agreement should have in place and all capital and expense decided on then. I wouldn't do the return until the agreement is settled.

[Gretel]

what is each partners share (%) in the business. I would show capital for whomever paid the bills and if their agreement is they all share income/expense by % anyone that didn't contribute still gets their (%) of expenses. I don't like the idea of deciding after the fact who does what...the agreement should have in place and all capital and expense decided on then. I wouldn't do the return until the agreement is settled.

The operating agreement was in place from the beginning, 25% each of everything, then changing to 1/3 after 1 member disappeared.

What I don't feel comfortable with is not having equal contributions and having to deal with special allocations. The only thing I know for sure about special allocations is that this requires to keep 2 sets of books, one at book values, one at FMV. It just scares me.

Besides I had no good suggestion yet what to do with the "contribution" of LLC Z.

I am still waiting, thinking and hoping.

Thank you.