How to write off LLC investment in startup

Forum|Forum|2 years ago
August 18, 2023
2 replies
0 views

I've been a passive member of an LLC investment since 2010, and for years the company hasn't had any material change in their business. My annual K-1 always has 0 in box 1, and TurboTax has carried forward a passive loss of -$5002 (box 1 - ordinary income) and -$857 (non-portfolio long-term capital loss).

I would like to write this investment of $5000 off, since I believe it is worthless. But I need to know exactly how to do this in Turbotax.

Thank you in advance for your assistance!

Mike9241

it is important to know why the LLC has not terminated and filed a final return and K-1s. if it is still operating it might be difficult to prove to the IRS that your investment is totally worthless. it may be that under the LLC agreement you don't get any further allocation of loss.

strabunAuthor

I understand and agree. However, other investors in this startup have told me that they have written off their investments for tax purposes, so I thought I would ask how to do it in TurboTax. I have reached out to the private equity firm that has a controlling interest to see if there is a way for me to sell my shares or abandon my investment. I just don’t know the best way to handle it, and would benefit from the write off this year.

Mike9241

use this thread below in helping you to determine whether your entitled to take your loss. it's limited to your 1) original investment plus 2) any income included in your tax returns over the years plus 3) any tax-exempt income over the years less 3) any losses deductible on your tax returns (does not included suspended passive losses) over the years less 4) any distributions received over the years less 5) any expenses under the tax laws that would not be deductible such as travel and entertainment (this does not include suspended passive losses). the result is your "basis".

**********

if you conclude that a writeoff is proper then you indicate in Turbotax that the current year is a final year and you've disposed of your entire interest. this will allow the suspended passive losses to pass through. if the losses exceed your "basis" you'll have to use the at-risk form 6198 to limit the deduction to your "basis"

*********

https://www.thetaxadviser.com/issues/2020/may/deduction-worthless-partnership-interest.html

while this refers to a partnership it would also be applicable to an investment in an S-Corp

Rick19744

Employee

I will add a few comments:

Just reiterating what has been mentioned, but it is a critical component, in order to be able to prevail in a worthless investment deduction, this deduction must be taken in the appropriate year.
Your facts indicate that others wrote off the investment in other years, and you are now wanting to write this off in 2023. If audited, you will need to be able to support your position as to why 2023 and not an earlier year, or for that matter, see bullet 4. Just because others have taken a worthless investment deduction in the past, does not mean that the investment is truly worthless. It just means that there was no trigger for an audit, and not having to support their position.
I'm not sure after 10 years I would call this entity a start-up. Regardless, you are actually receiving K-1's. Are the other investors that wrote off the investment also still receiving K-1's?
Bullet 3 could be a key component. While you may not be currently (nor in the past) receiving any income, deduction, etc., what would happen upon a liquidation of the LLC? Would you receive any proceeds in a liquidating distribution?
As a member, you should ask for a copy of the financial statements. What does the balance sheet look like? This would be a key factor in being able to support a worthless investment deduction.
Take this slowly and make sure that you have the documentation to support a worthless investment deduction for 2023 if that is what you decide.

*A reminder that posts in a forum such as this do not constitute tax advice.Also keep in mind the date of replies, as tax law changes.

strabunAuthor

Rick,

Thank you so very much for your comments. You make very good points and I will attempt to obtain more information from the company so that I can make a decision about what to do. I certainly do not want to risk being audited. Thank you again!

Steve

Mike9241

@strabun the risk of an audit, generally very low, exists regardless of what year you write it off. some returns are chosen at random others are selected because something on the return gets it flagged but then a human reviews it to determine whether an actual audit should be done.