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Megan C
Megan C, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 15588
Experience:  Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
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I am one of three partners in a liquidating insolvent partnership

Resolved Question:

I am one of three partners in a liquidating insolvent partnership LLC that has not been officially terminated. I provided $162000 of equipment rental that I owned to this partnership from 1999 through 2012 without billing until now. Hours of use have been meticulously compiled. This debt is owed by the partnership to me the partner. However, this nursery partnership is insolvent and as such a business debt that is worthless. Can I write this debt off as an ordinary deduction using IRS section 166 interpretation?
Submitted: 1 year ago.
Category: Finance
Expert:  Megan C replied 1 year ago.

Megan C :

Thank you for your question, and thanks for using JustAnswer.com. How are you today?

Megan C :

For a related party debt to be able to be written off as worthless, you would have had to have a written debt agreement with the partnership. This would have to specify the amount of the loan, and the interest rate charged.

Megan C :

If there is no formal documentation of the note, the IRS could classify it as an equity investment in the company, rather than debt.

Customer:

there was not a loan. the specific equipment was available on an on call basis. county average rental rates were used to compile the cumulative costs that was presented periodically to the partnership. the partnership agreement specifies for the indemnification of these costs, but since the partnership is insolvent my costs are uncollectible bad debt.

Megan C :

If the partnership agreement documents that these amounts should be repaid to the partner, then the partner is a creditor

Megan C :

However, if there is no documentation of this then the IRS will classify as an equity investment

Customer:

I have documented every piece of machinery used and the time and years they all were used.

Megan C :

That's fine that you have documented this, but is it documented anywhere that the company will reimburse you as the partner for these expenses?

Customer:

Section 4.8 of our articles of organization states: the company shall indemnify the members, for all costs, losses, liabilities, and damages paid or accrued by such member,, and advanced expenses incurred by the member, in connection with the business of the company.

Megan C :

Okay then you are covered. You would have a non-business bad debt and can deduct as a capital loss.

Customer:

In reading IRS section 166, I interpret this expense as a business debt because it is a debt not created or acquired in connection with my business as a taxpayer that is independent from the partnership business we are talking about now--as well as a bad debt loss worthlessness not incurred in my independent business but that of the partnership LLC.

Megan C :

Okay, it is a business bad debt and you can deduct in full.

Megan C :

Is there anything else I can assist you with tonight?

Megan C :

It's a business bad debt if the debt arises from your separate business. If you simply lent the money to the partnership then it would be a non business bad debt. You can read more here: http://www.irs.gov/publications/p535/ch10.html

Customer:

I interpret separate business as the partnership LLC.

Megan C :

Do you generate taxable income in an activity which the partnership used? For example, are you in the business of equipment rental?

Customer:

No

Megan C :

That would be a business bad debt. If you operated an equipment rental business, and the partnership utilized that --then it would be business bad debt.

Customer:

I have many pieces of equipment on my farm. I rent my equipment to whoever wants to use it. the partnership LLC desired to use certain pieces of equipment that I rented to them. However, I am not in the equipment rental business,except as it applies to the partnership LLC and random other farmers.

Megan C :

Do you earn income from the rental? If so, then you are in the business of rentals. If that's the case then you have a business bad debt

Customer:

Yes, I earn income from the rentals.The delay in the collection of the rentals from the partnership LLL was simply because I was anticipating profitability that through mismanagement one of my partners never materialized.

Megan C :

Then you can say this is a business bad debt. The amount would be fully deductible in the current year

Megan C :

Is there anything else I can assist you with today?

Customer:

Thank you so much!

Megan C, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 15588
Experience: Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
Megan C and 3 other Finance Specialists are ready to help you
Expert:  Megan C replied 1 year ago.
Thank you Roger for your positive rating. Please come back and visit me any time you need a tax, finance, or social security question answered. It was a pleasure working with you today.

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