Guaranteed payments - basis?

[KJ Judd]

Son receives guaranteed payments for services performed for LLC. He also owns 10% of LLC. In 2007, LLC generates a large loss. Son does not have enough basis to deduct loss looking at his capital account.

Example:
Guaranteed payments $25,000
Share of loss ($5,000)
Capital account $1,000

My software is not allowing his share of the loss to offset guaranteed payment income. It doesn't seem right that he has to pick up all the income and not get to deduct any loss.

Is this correct?

[Gretel]

Yes, this is correct. Guaranteed payments are like wages and do not effect basis.

[geekgirldany]

I just looked it up in TTB and that seems to be correct to the information I read. The GP are deducted from the Partnership income. So he would not be able to take the loss off the GP and they do not effect the basis.

[veritas]

Are you also using

The partner's share of liabilities (if any) for basis?

[DTS]

Kj

It seems the loss will lower the g/p to $20,000 for SE earnings and the capital acct will now be ($4,000).

Maybe, someone will confirm this for you??

Dennis

[DTS]

Kj

Another thought...do you have him classified correctly, individual active and not passive?

Dennis

[Bees Knees]

I agree with everyone, guaranteed payments do not increase basis.

Also, If this is an LLC and the LLC member is not personally liable for the debt, the liabilities do not increase basis.

And if a loss is not allowed, it cannot reduce SE taxable income.

Also, if this is an LLC and the taxpayer has taken the position that only guaranteed payments are subject to SE tax, then K-1 line 1 profits do not increase SE tax, and likewise K-1 line 1 losses do not decrease SE tax.

[KJ Judd]

Thanks everyone for your prompt responses. He is not liable on any of the LLC debt. And I do have him classified as active.

Before I went to the taxpayer on this, I wanted a confirmation.

[Nashville]

Mass Ignorance and Software

And if a loss is not allowed, it cannot reduce SE taxable income.

The above statement is true, but there are interesting convolutions with software packages.

The problem lies with the fact that the individual shareholders/partners are responsible for keeping up with their own basis, and not the entity itself. In the example given, the entity furnishes a K-1 with a $5000 loss, whether the partner can deduct it or not. Additionally, all of the K-1s in the new format (last 2-3 years) contain a supplemental page telling the partner/shareholder exactly where to include the K-1 data on the personal return.

Nowadays this means the individual will be punching this stuff into TT, or a storefront chain will have an employee keypunch these items into other commercial software.

And guess what? How many times will anyone punch in less than the $5000 loss? The individual most likely doesn't even know what "basis" is, and many employees can't even spell it. Almost all preparers who use this board know better, but not so for self-prepared individuals and fledgling preparers.

So what can we do to assure the government collects the proper amount of revenue? Certainly nothing that's going to keep us awake at night.

[JON]

2007

Two things are supposed to be happening. K-1 matching - yes they are trying again and if losses on a K-1 they expect 6198 to be filled out or they say it will generate letters requesting the information.