It will be a business bad debt once you have made efforts to collect and have determined that you will not be reimbursed.
I can't collect from the bank to whom I made a settlement payment under a personal guaranty. The bank doesn't owe me anything except an agreement that the settlement is final and that the guaranty is cancelled. So how can this be a business bad debt?
It is a business bad debt because you had to pay a debt of a business venture that you invested in.
The other members would be the ones that you would try to collect from. It appears from your initial facts that you have.
As far as the promissory Notes i have with the LLC's, don't I have to make the case that I am in the "trade or business" of lending money in order to claim a business bad debt? I did mak 4 loans, and prior to that I loaned money to another company and have loaned money in private placements for real estae construction loans. Maybe that means I am in the trade or business of making loans. I'm concerned that the LLC's to whom I leant money were thinly capitalized and that the IRS would claim that my loans were equity not debt. We're talking about 6 and 7 digit loans here!
You don't have to be in the business of making loans. You need to have become obiligated to pay due to a business purpose. The business purpose is the investment in the LLC. You have the operating agreement and the loan documents to prove business purpose. A personal bad debt would be if you loaned money to a friend and they did not pay you back. In that case you did not loan the money with the intent of entering into a business venture.
Passive losses are limited to passive income. They would be reported on 4797.
I am going to answer the doctor office question. However that should be a new question.
I think it is similar to the other facts and I would also treat that a business bad debt.
If you need more info about the guaranty of the bank loan to the doctor, who is a partner in the LLC (along with me and two others) which sold the two condo units to him, let me know. I plan to sue him to repay the loan payments I made (as well as taxes) on his behalf after the bank forecloses on the two condo units. He's apparently insolvent, so suing may not make sense except to get my judgement against him on file with the court.
Regarding the non-passive investment, where on Schedule E do I report the bad debt write off?
Bad debt gets written off on form 4797 for non-passive and passive. For passive you also have form 8252.
As far as the doctor that is a new question.
The character of the loss is a difficult analysis. It is going to be subject to the CPA preparing the return's analysis of the facts. I do not agree that it needs to be in the same proportion as your ownership. You can ask the partnership to amend returns. However, they are only going to do it if it is accordance with the laws.
I do agree that a payment by a partner of the partnership's loans as a result of personal guaranties are an increase in basis. They become bad debt when you can no-longer recover the basis in liquidation of the partnership.
So it sounds like you're saying that (a) my loans to the partnership to pay its expenses or for capital improvements and (b) payments to the bank of the partnership's loans because I''m a guarantor both are an increase in my basis in the partnership. So when the partnership is liquidated my capital gain is lower or my capital loss is higher; but I don't get a deduction against ordinary income in excess of $3000 because these expenditures are not characterized as business loans and therefore cannot be charged off as business bad debts when uncollectible (loans) or paid (guarantee payments). This appears to be a reversal of your previous position where you said if my loans were made for business purposes, even if I am not in "the trade or business" of making loans, I could get a bad debt write-off if they were uncollectible.
FYI, when I made these loans, I purposely loaned the money directly to the partnerships with a signed promissory note, charged market interest, collectedinterest for a period of time, some of the loans were repaid, new advances were made and in two cases, the managing member guaranteed the loans personally. However, no members contributed equity capital so the partnerships were funded entirely with full recourse secured (and guaranteed) bank loans and unsecured (but guaranteed) member loans.
The fact that my loans were not made in proportion to my ownership is very important: I did not receive the full benefit of the losses incurred by the partnerships (which were mostly passive and will be usable when the partnerships are wound down). This means that some partners have more negative capital accounts than they would otherwise have had and of course face higher capital gains on disposition. But they also will have more passive losses.
I believe that sounds correct. This is a very complicated question. If you don't already have a CPA of your own you should probably engage one. Often the CPA of the LLC or partnership is going to answer in the best interest of the LLC. You need someone to do this analysis with your facts.
This will be more costly than Just Answer. But you will have an answer that is based on the law that you can rely on.