1065 negative basis

[BOB W]

What should be done, if any, when a member of an LLC ends up with a negative K1 basis?

[kathyc2]

What should be done on the 1040? 6198 if due to a loss. D if distribution received over basis.

[TaxGuyBill]

Can you clarify what you mean and expand on the situation? Basis can't be below zero, so you need to clarify what you mean.

[TaxGuyBill]

6198 if due to a loss.

No, 6198 is for At-Risk limitations, NOT Basis limitations.

[BOB W]

This is a 4 member LLC where each member provided training class instruction and were paid as guaranteed payments for their time. Capital $$ investment for each were about equal. One member did a lot teaching while the others did less. After expensing guaranteed payments, a loss was created (35,000). (This is a startup first year.) When the allocated loss on the 1065 was applied to each member, one member's capital account became negative. My concern is, is this a problem? I know that with an S Corp it became a taxable event. I don't do many multi-member (3 or more) partnerships with guaranteed payments so not sure how to proceed with a negative capital account with one member's negative balance.

[kathyc2]

This is a 4 member LLC where each member provided training class instruction and were paid as guaranteed payments for their time. Capital $$ investment for each were about equal. One member did a lot teaching while the others did less. After expensing guaranteed payments, a loss was created (35,000). (This is a startup first year.) When the allocated loss on the 1065 was applied to each member, one member's capital account became negative. My concern is, is this a problem? I know that with an S Corp it became a taxable event. I don't do many multi-member (3 or more) partnerships with guaranteed payments so not sure how to proceed with a negative capital account with one member's negative balance.

Yes, I understood that you meant negative capital, as this is what shows on the K1. Guaranteed payment is fully taxable. The amount of Box 1- ordinary loss that can be claimed is limited to basis (at risk) calculated on a 6198. If there is a profit next year, the taxable amount for this member will be reduced by the amount of loss that was not allowed this year. Unless money other than guaranteed payment was taken out, you don't have a distribution taxable event.

[BOB W]

kathyc2, thanks for your response, your response is aways appreciated and complete. But I was concerned with showing a negative capital account and any IRS problems with that. Your answer eliminated that question as IRS is using basis limitation for loss claimed, which I knew but was concern at just showing a negative capital balance on the K-1, apparently it is not a problem although I read that having a negative balance can be a problem but I guess we are talking about larger numbers and over a longer period of time.

[terryats]

Here is a good gov source on topic of partnership inside & outside basis (outside can never be negative)

https://www.irs.gov/pub/irs-utl/partners-outside-basis.pdf

[BOB W]

Thanks. good reading.