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Old 03-19-2014, 04:10 PM
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Shareholder Basis and rules for bad debt write off

I am a shareholder in a multi-member LLC that shut its doors in 2013. Over the last few years we have calculated allowable losses and income using the shareholder basis which was a combination of my initial investment along with a $10K sub-debt loan to the company. However, the $10K loan made to the company which is documented by a Promissory Note, will now be a total loss since the company is no longer operating due to insolvency (bankruptcy was not filed).

With all of this in mind, can I, as a shareholder, write off that 10K loan as a non-business bad debt write off which I believe is an offset against against capital gains on my personal tax return. OR would that be dissallowed by the IRS since it was considered already in my calculations to determine shareholder basis over the last few years?

I hope this make sense. Whatever help is available is greatly appreciated.



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Old 03-21-2014, 07:43 AM
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Originally Posted by NickiAZ View Post
With all of this in mind, can I, as a shareholder, write off that 10K loan as a non-business bad debt write off which I believe is an offset against against capital gains on my personal tax return. OR would that be dissallowed by the IRS since it was considered already in my calculations to determine shareholder basis over the last few years?

I hope this make sense. Whatever help is available is greatly appreciated.
I guess the best way to treat this is to classify the loan as a loan from you, a partner. The partnership will pay you the same interest that the loan has, thereby deducting the interest expense ,1099-INT required at end of year. you will then report the interest income on your return, but you can deduct investment interest expense for the same amount. This loan should be documented as well.aslongas loan was indeed used by the business for biz purposes, interest tracing rules would allow the deduction to be made. you can deduct the interest on the 1065 as int exp of the llc. The balance of the loan should also be reported on the balance sheet on sch L of 1065;as the partnership lost money so you got K-1 showing your share of loss (10K).so your loan to the partnership is worthless where does you write off the business bad debt on your 1040. If it is a true loan, then you have stcl of $10k from loan for $10K I do not think the bad debt could be a "business" bad debt unless you were in the business of lending money. The sub K rules should prevent any double dipping. Because you bore the risk of loss on the loan, it should have been allocated to you and increased your loan basis in your partnership interest by 10k . as the debt is written off as a bad debt or you leave the partnership, whichever happens first, this will cause a decrease in outside basis by 10k. If there is basis left over, the 10K loss can be taken to the extent of basis; if no basis is left over, no loss except $3k a year as stcl. On the contrary, The bad debts of a corporation are always business bad debts.

Note; LLC owners , like you, are not referred to as shareholders, but as members. A member’s share of ownership in the LLC is determined by the LLC’s operating agreement or by some other document that outlines each member’s ownership interest. The LLC ownership structure is different from a corporation in this way. Though some LLCs may issue ownership certificates to its members so that each person knows how much of the LLC they own, these are not true stock certificates. Only corp shareholders own stock. Because of the ownership structure of LLCs, there is no such thing as a publicly traded LLC. A limited liability company will not appear on the NASDAQ and may not issue stock like a corp does.



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