Reporting a business loan loss made by an LLC

Forum|Forum|2 years ago
January 13, 2024
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My daughter runs a single-member LLC which made a $22,000 loan to another business. That business has folded, but repaid $12,000 to her LLC before folding. How does her LLC report the $10,000 loss? Does she have to add an attachment to her return describing the loss? Can the return still be e-filed (since it is a very large return)?

Best answer by Mike9241

If there was no business purpose for the loan, it is a non-business bad debt which would be reported as a short-term capital loss. If there was a business purpose, record it as a business bad debt on schedule C. Hopefully, if it's a business loan she has documentation to prove it. For a nonbusiness loan, all she would need is documentation the loan was made. Without proper documentation she faces disallowance if audited.

Mike9241Answer

GGBJrAuthor

Thanks for the prompt response. It was a business loan made to a sub, owned also by her, so it will be tricky documenting the loan. However, if Schedule C is used, I presume that e-filing will not be a problem? Does a separate document have to be attached to the return?

Mike9241

What happened to the sub and what type of entity was it? Now that you point out that it's between related parties (EXTREMELY IMPORTANT), her, her business (schedule C) and the sub(?) there is no deductible loss on her schedule C. The loan would be treated as a direct loan from her to that sub and thus becomes part of her tax basis in that entity.

To clarify a single-member LLC is a disregarded entity for tax purposes so the loan is between her and her sub(?) which is also her. Assuming the sub also went out of business and there was no cash or other assets left to repay the "loan" then the loss of that money is reflected in the loss of the sub. So a write-off on her schedule C would be double dipping. If the sub is still in existence then the loan is like the money she put in directly so she looks to that entity for the eventual repayment.

The answer I previously gave was a loan between unrelated entities.