Husband and wife 51% and 49% ownership in LLC, which has been doing business for about 6 years. Now they have had a couple of bad years and MAYBE "at risk" will prevent them from taking the total loss. Retaining walls and stone work is the business and they have a bank loan for about $40,000 and Bobcat and accessories loan for about $12,000. They do not think they are on either loan. They believe the $40,000 was incurred on equipment purchases. My intial look at it says they need about $10,000 to split between them to use the entire loss this year. Can I use eith of the loans to get there?
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Not on Loan??
They may think they're not guarantors, but I'd bet they are. Assuming this LLC is being taxed as a partnership, they're at risk. Check the loan documents.Originally posted by JON -
Being taxed as a partnership does not make them at-risk.
At-risk means what it means. If they are at-risk to pay back the debt, they have basis. If not, due to their LLC status, they don’t have basis.
The difference between an LLC taxed as a partnership and an S corporation is that personal guarantees do not add to basis for an S corporation shareholder, whereas personal guarantees DO work for LLC members. But if there is no personal guarantee on the loan, the LLC member is not at-risk to pay back the loan, therefore, no basis to deduct the loss.Comment
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Bees
I have heard this before. In 1999 I went to an LLC seminar on how it functions. The presentor's comments, an attorney, were basicly you can call yourself an LLC under the state law you are in, but as far as the IRS and a lot of creditors are concerned you are a general partnership. He went on to discuss the creditor issues and agreed some protection is there, but until courts decide he said he would not promise anything to LLC members. For tax purposes he finished by saying he thought LLC members would have the same at risk problems that a Schedule C proprietor would have. In 2001 I had an audit of Schedule C which was the first year of the operation and had a huge loss, big profits every year since then, lots of loans helped create the loss and I did not worry about 6198 and it was never questioned at the audit.Comment
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Payroll taxes
The IRS has stated that payroll taxes are nonrecourse debt.Comment
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That is what I meant by my comment. Partners get basis for loan guarantees.Originally posted by Bees KneesComment
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The regulations do have something to say on that. In the case of a disregarded entity, such as a single member LLC, the single member is treated as being at-risk for the LLC debts, but only up to the net value of the assets in the LLC [Proposed Regulation 1.752-2(k)]. If the net value of the LLC is zero (because the liabilities exceed the value of its assets), the owner of the single member LLC would have zero at-risk basis. It gives the following examples that illustrate the principle:Originally posted by JON
EXAMPLE 1. Disregarded entity with net value of zero.
(i) In 2005, A forms a wholly owned domestic limited
liability company, LLC, with a contribution of $100,000. A
has no liability for LLC’s debts, and LLC has no
enforceable right to contribution from A. A files no
election with respect to LLC under section 301.7701-3 of
this chapter. Also in 2005, LLC contributes $100,000 to LP,
a limited partnership with a calendar year taxable year, in
exchange for a general partnership interest in LP, and B
and C each contributes $100,000 to LP in exchange for a
limited partnership interest in LP. The partnership
agreement provides that only LLC is required to make up any
deficit in its capital account. On January 1, 2006, LP
borrows $300,000 from a bank and uses $600,000 to purchase
nondepreciable property. The $300,000 debt is secured by
the property and is also a general obligation of LP. LP
makes payments of only interest on its $300,000 debt during
2006. Under sections 1.752-4(d) and 1.705-1(a), LP
determines its partners’ shares of the $300,000 debt at the
end of its taxable year, December 31, 2006. As of that
date, LLC holds no assets other than its interest in LP.
(ii) Under section 301.7701-3(b)(1)(ii) of this chapter,
LLC is a disregarded entity. Because LLC is a disregarded
entity, A is treated as the partner in LP for federal tax
purposes. Only LLC has an obligation to make a payment on
account of the $300,000 debt if LP were to constructively
liquidate as described in paragraph (b)(1) of this section.
Therefore, under paragraph (k) of this section, A is
treated as bearing the economic risk of loss for LP’s
$300,000 debt only to the extent of LLC's net value.
Because that net value is $0 on December 31, 2006, when LP
determines its partners’ shares of its $300,000 debt, A is
not treated as bearing the economic risk of loss for any
portion of LP’s $300,000 debt. As a result, LP’s $300,000
debt is characterized as nonrecourse under section 1.752-
1(a) and is allocated as required by section 1.752-3.
EXAMPLE 2. Disregarded entity with positive net value.
(i) The facts are the same as in Example 1 except that on
January 1, 2007, A contributes $250,000 to LLC and LLC
shortly thereafter uses the $250,000 to purchase unimproved
land. LP makes payments of only interest on its $300,000
debt during 2007. Under sections 1.752-4(d) and 1.705-1(a),
LP again determines its partners’ shares of the $300,000
debt at the end of its taxable year, December 31, 2007. As
of that date, LLC holds its interest in LP and the land,
the value of which has declined to $175,000.
(ii) A’s contribution of $250,000 to LLC on January 1,
2007, constitutes a more than de minimis contribution of
property to LLC. Accordingly, under paragraph (k)(2) of
this section, LLC's value is redetermined on December 31,
2007, when LP determines its partners’ shares of its
$300,000 debt. As of that date, LLC’s net value is
$175,000. Therefore, under paragraph (k) of this section, A
is treated as bearing the economic risk of loss for
$175,000 of LP’s $300,000 debt. As a result, $175,000 of
LP’s $300,000 debt is recharacterized as recourse under
section 1.752-1(a) and is allocated to A under this
section, and the remaining $125,000 of LP’s $300,000 debt
remains characterized as nonrecourse under section 1.752-
1(a) and is allocated as required by section 1.752-3.Comment
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I agree with
that. If there is "net" value has nothing to do with your personal basis at risk.Comment
Comment