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Old 10-06-2011, 03:18 AM
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Sale of partnership interest at a loss: Can I claim this loss on my tax return?

Hello,

I recently sold my 50% interest in a small retail business for a loss compared to the cash I put into the business. I was told I could have claimed the loss on my tax return for a write off. Is this true?

Following is a brief summary of my situation:

1. In 2007, I put in $75,000 cash to start up the business and my 50% partner also put in $75,000.

2. During 2007, 2008 and 2009 both my partner and I put in about an additional $20,000 each to keep the business afloat during this tough economic climate putting our cash into the business at approximately $95,000 each.

3. From 2007 thru 2009 I wrote off approximately $40,000 in ordinary business losses from K1’s Form 1065 on my personal income tax filings.

4. In 2009 I sold my 50% interest for $20,000 cash to my partner, which was documented as a partner distribution on the company’s 2009 Form 1065, which reflected my ending capital at 0%.

Can I claim the actual cash loss of $75,000 ($95,000 cash infusion less the $20,000 cash buyout) from the sale of my 50% ownership of the business? Or is the amount I can claim less, since I did have the benefit of operating losses in 2007, 2008 and 2009 when I was still a partner in the business?

If I can claim this loss, how do I file for this loss? What form do I use to file the loss? Do I need to make an amendment to my 2009 tax return, since this sale took place in 2009?

Is there a deadline to file amendments to a 2009 tax return? Can the loss be filed on my 2010 return instead that I will be filing any day now?

If I have to amend my 2009 return, how does that affect my 2010 return that is about to be filed? I am assuming there will be some sort of “Loss” carry forward. Will I also have to amend 2010’s return as well if I don’t take care of the 2009 amendment before filing my 2010 return?

Your guidance is greatly appreciated.
Thanks!
JC



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Old 10-07-2011, 04:14 AM
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Join Date: Oct 2010
Posts: 5,227
“I recently sold my 50% interest in a small retail business for a loss compared to the cash I put into the business. I was told I could have claimed the loss on my tax return for a write off. Is this true?”---> Correct; the sale of a partner's interest in a partnership usually results in capital gain or loss. Your gain or loss is the difference between the amount realized( the selling price you received) and the adjusted basis of your interest in the partnership. However, any gain/loss related to unrealized receivables or substantially appreciated inventory may be taxed as ordinary income/loss. The sale is treated like any other sale of a business or business asset.
Following is a brief summary of my situation:
1. In 2007, I put in $75,000 cash to start up the business and my 50% partner also put in $75,000.
2. During 2007, 2008 and 2009 both my partner and I put in about an additional $20,000 each to keep the business afloat during this tough economic climate putting our cash into the business at approximately $95,000 each.
3. From 2007 thru 2009 I wrote off approximately $40,000 in ordinary business losses from K1’s Form 1065 on my personal income tax filings.
4. In 2009 I sold my 50% interest for $20,000 cash to my partner, which was documented as a partner distribution on the company’s 2009 Form 1065, which reflected my ending capital at 0%.

“Can I claim the actual cash loss of $75,000 ($95,000 cash infusion less the $20,000 cash buyout) from the sale of my 50% ownership of the business? Or is the amount I can claim less, since I did have the benefit of operating losses in 2007, 2008 and 2009 when I was still a partner in the business?”---->I guess your situation is very complex. You claim less due to the benefit of yur operating losses , $40,000, ordinary losses. When you invest in the partnership, the partnership maintains a capital account for your investment. Your individual capital account is reflected on Schedule K-1, which the partnership furnishes to all the partners for tax reporting purposes.Your capital account includes your initial investment, $75,000, and changes that occur during the period of ownership( I guess additional $20,000 put in to keep the business afloat). Your capital account is increased for income that you recognize and decreased for losses that you sustain. It is also increased for additional investments and decreased for withdrawals. So, you r basis might be $55,000; $95,000-$40,000 and you sold it for $20,000.So, your loss( ordinary loss as you said)is $35,000; $95,000-$40,000-$20,000. I mean your basis of the partnership interest is the money plus the adjusted basis of any property you contributed. As you recognized ordinary loss ,$40,000 in 2007,8 and 9,, this loss decreased the basis of your interest.So, I guess your partnership basis was decreased by $40,000(ordinary business losses) as distributive share of your losses. You are with negative outside basis.
“If I can claim this loss, how do I file for this loss? What form do I use to file the loss? Do I need to make an amendment to my 2009 tax return, since this sale took place in 2009? “---->The ordinary losses from the partnership are reported by you on your respective tax form. In the case of individual partners, the appropriate form is Schedule E Page 2. Partnerships and S corporations generally cannot use an NOL. However, you , as a partner, can use your separate shares of the partnership's business deductions(losses) to figure your individual NOLs. Your share of the partnership loss (including capital loss) is allowed only to the extent of the adjusted basis of your partnership interest at the end of the partnership's tax year in which the loss occurred (but before reduction by the current year's loss). This is not necessarily the same as the balance in the partner's capital account. Any excess is allowed as a deduction in later years to the extent that the partner's basis is increased above zero. So, you need to file your amended returns for those years, 2007,8, and 9.There are no limits the number of times you can amend a return. You can file Three years of taxes at one time. As you can see, you need to use Form 1040X to file an amended income tax return to correct previously filed Form 1040. An amended return cannot be filed electronically, thus you must file it by paper.
“Is there a deadline to file amendments to a 2009 tax return? Can the loss be filed on my 2010 return instead that I will be filing any day now?”---->No; a separate amended return, 2007, 8, or 9, is required for each year that is being changed. A claim for refund usually must be filed within 3 years of filing the original tax return but you are not subject to the rule.
“If I have to amend my 2009 return, how does that affect my 2010 return that is about to be filed? I am assuming there will be some sort of “Loss” carry forward. Will I also have to amend 2010’s return as well if I don’t take care of the 2009 amendment before filing my 2010 return?”---->As said above, you need to file 2007, 8, 9 amended returns. As I assume that 7you have already filed your 2010 return, then you need to amend your 2010 return also. You need to amend both federal and state returns. Your state tax liability may be affected by a change made on your federal return. For information on how to correct your state tax return, contact your state tax agency.



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