I'm filing my Schedule K-1 with TurboTax and got this checkbox to check - "All of my investment in this activity is at risk". What does this actually mean?

Here's my situation:
* worked for an LLC last year that didn't generate any revenue
* I've "invested" my time (duh), car (went to business meetings), and my laptop.
* When I was hired, I got an equity stake in this LLC

Long story short, if I check that box, my federal refund goes up by a few hundred bucks. But can I good conscience check that box? What if I get audited, how can I prove that my "investment" was at risk? I haven't invested any cash.

Thanks,
J

PS: I'm in CA if that matters

“I'm filing my Schedule K-1 with TurboTax and got this checkbox to check - "All of my investment in this activity is at risk". What does this actually mean?”----> Your personal investment is considered an At-Risk investment for the money and adjusted basis of property you contribute to the activity, and amounts you borrow for use in the activity as long as you are personally liable for repayment, or you pledge property (other than property used in the activity) as security for the loan. ALSO, you are At-Risk for amounts borrowed to use in the activity if you are personally liable for repayment. You are also at risk if the amounts borrowed are secured by property other than property used in the activity. In this case, the amount considered at risk is the net FMV of your interest in the pledged property. The net fair market value of property is its FMV (determined on the date the property is pledged) less any prior claims to which it is subject. However, no property will be taken into account as security if it is directly or indirectly financed by debt that is secured by property you contributed to the activity.
“Here's my situation:* worked for an LLC last year that didn't generate any revenue* I've "invested" my time (duh), car (went to business meetings), and my laptop.* When I was hired, I got an equity stake in this LLC. Long story short, if I check that box, my federal refund goes up by a few hundred bucks. But can I good conscience check that box? What if I get audited, how can I prove that my "investment" was at risk? I haven't invested any cash.”---->Assuem that you have a loss in your business for the year. Can you use that loss to decrease your taxable income? It depends on the type of legal entity of your business and whether your investment in the business is "at risk" in whole or in part. Since your business is a MMLLC or a regular partnership, you can also offset losses, up to the amount of your investment "basis" in the business. Foe example, say,Jim and Tom are partners in small consulting firm. They both put $20K into the business and are sharing profits and losses 50/50. They also took out a loan for $60K for startup. The initial basis for each partner is $40K ($10K plus $30K).The first year, they had income of $5,000 and expenses of $25,000, for a loss of $20,000. They split the loss 50/50, so each has a loss of $10,000. Since they have a $40K basis, they can each take their full share of the loss to offset other personal income for the year as $40K , baisis>$10K loss.This leaves Jim and Tom with a basis of $30K the next year, unless they take out other loans or add to their investment. If their loss is greater than $30K ($40K-$10K)each, they can only take the loss up to the $30K.

Hi Wnhough,

Thanks for your reply. The forum must have done something to it because it looks really hard to read, all in one paragraph with no spacing.

OK, so I didn't contribute any money to the activity, and we didn't take any loans. We took investments in exchange for equity.

The property would be my car and laptop. Assuming these count, that would be $3k total.

We didn't put any cash in, we took investments.

No loans either, so the basis is $0? Or $3k from the car+laptop?

Sure, say our total loss is $15k, the amount of investment we burned through. There's three of us, so $5k each.

Guess I didn't follow the calculation here. Jim and Tom had a loss of $10K each and a basis of $30K. How did the $5k basis result?

Anyway, in our case, our basis is $0K in cash (plus the $3k FMV of property), and the loss is $5k each. Not sure whether I can check the "All of my investment in this activity is at risk" box.

“I'm filing my Schedule K-1 with TurboTax and got this checkbox to check - "All of my investment in this activity is at risk". What does this actually mean?”
----> Your personal investment is considered an At-Risk investment for the money and adjusted basis of property you contribute to the activity, and amounts you borrow for use in the activity

“OK, so I didn't contribute any money to the activity, and we didn't take any loans. We took investments in exchange for equity.The property would be my car and laptop. Assuming these count, that would be $3k total.”--->As long as you contributed your car/laptop in the activity, the adj basis of car/laptop is subject to risk activity rule.


Quote:
Originally Posted by Wnhough
“Here's my situation:* worked for an LLC last year that didn't generate any revenue* I've "invested" my time (duh), car (went to business meetings), and my laptop.* When I was hired, I got an equity stake in this LLC. Long story short, if I check that box, my federal refund goes up by a few hundred bucks. But can I good conscience check that box? What if I get audited, how can I prove that my "investment" was at risk? I haven't invested any cash.”----> Assuem that you have a loss in your business for the year. Can you use that loss to decrease your taxable income? It depends on the type of legal entity of your business and whether your investment in the business is "at risk" in whole or in part. Since your business is a MMLLC or a regular partnership, you can also offset losses, up to the amount of your investment "basis" in the business. Foe example, say,Jim and Tom are partners in small consulting firm. They both put $20K into the business
“We didn't put any cash in, we took investments.”----->OK I see. The example, that I gave you is just for a hypothetical situation to let yo understand the risk activity rule a little bit easily.

“and are sharing profits and losses 50/50. They also took out a loan for $60K for startup.”

“No loans either, so the basis is $0? Or $3k from the car+laptop?”---->Your basis is $3K, so you are subject to risk activity rule up to $3k, meaning you can deduct $3K of your losses in the activity ASLONG AS the properties are used in the activity.

Quote:
Originally Posted by Wnhough
The initial basis for each partner is $40K ($10K plus $30K).The first year, they had income of $5,000 and expenses of $25,000, for a loss of $20,000
“Sure, say our total loss is $15k, the amount of investment we burned through. There's three of us, so $5k each.”---->Correct. You, as partners of the MMLLC, split the loss 1/3, so each has a loss of $5,000’$15K/3=$5k.


Quote:
Originally Posted by Wnhough
They split the loss 50/50, so each has a loss of $10,000. Since they have a $30K basis, they can each take their full share of the loss to offset other personal income for the year as $30K , baisis>$10K loss.This leaves Jim and Tom with a basis of $5,000 the next year,

“Guess I didn't follow the calculation here. Jim and Tom had a loss of $10K each and a basis of $30K. How did the $5k basis result?”---->You are correct; I am wrong, it is my bad, a typo, NOT $5K but $30K;$40K-$10K(loss)=$30K , a remaining basis for the next year. I corrected it.

“Anyway, in our case, our basis is $0K in cash (plus the $3k FMV of property), and the loss is $5k each. Not sure whether I can check the "All of my investment in this activity is at risk" box.”--->No. Your investment is at risk to the extent you will actually incur the loss if there is one. An investment is not at risk, for example, if you borrowed money that you don't have to pay back if the thing you bought with the money doesn't pay.As you can deduct ONLY $3K and c/f the excess $2K loss is called a suspended loss and may be carried over to future years indefinitely and deducted only when you have sufficient tax basis to claim the loss . As yo can see, “The at-risk rules” limit your losses from most activities to your amount at risk in the activity, $3k, in your case. You should treat any loss that is disallowed, $2K, because of the at-risk limits as a deduction from the same activity(PAL or at risk activity , I mean) in the next tax year. If your losses from an at-risk activity are allowed, they are subject to recapture in later years if your amount at risk is reduced below zero. You must apply the at-risk rules before the passive activity rules. You are at risk in any activity for the money and adjusted basis of property you contribute to the activity,i.e., car/ laptop or etc.