Personal loan to P-ship deductible upon dissolution

[Jesse]

I prepare mostly individual returns and do not work much with P-ships please excuse my ignorance:

Client has been in P-ship for many years and dissolved in 2009. They had recourse debt and have deducted losses over the years. The K-1 has a negative ending capital account of -$10,000.

Current ordinary business loss of -$4,000.

They started the business with personal monies – “loans to the business” and a bank note that they are now still personally liable for in the amount of $20,000.

Taxpayer has a hand written note to tell the new preparer that this $20,000 can be written off on personal return.

I’m trying to draw a picture in my mind – if they have had repetitive losses over the years and a negative ending capital account haven’t they already written off the $20,000 over the years?

Can they write this “personal loan” off, if so would it go on schedule A?


Going forward can the interest from that will be paid on the bank loan be written off as investment expense?

[Gretel]

I tend to agree with you, once basis of investment plus loans is zero, there is no more write off. There are probably some more complicated rules at play but I don't think they will change this picture.