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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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I had an LLC with my brother. In 2008 we stopped doing business.

Customer Question

I had an LLC with my brother. In 2008 we stopped doing business. We had some receivables that we never collected and knew were not going to collect. And we had some payables that we did not pay and were not planning on paying. Our vehicles we stopped paying on and they were repossesed. Some of the debt I personally guaranteed and some of the debt my brother personally guaranteed and the remaining no guarantee was needed. I filed chapter 7 bankruptcy in 2008 and had all the debts related to the business discharged from my personal obligation. My brother has not filed chapter 7 yet, but plans on it shortly. We never filed the 2008 1065 for the company. How do we account for the payables. Do we keep on the books because because we are not filing the business bankruptcy, or do we have to show as other income? Same with receivables. Can we show the right off? And the vehicles were in my name. Do we show gan or loss from disposal of asset. And if there are still balances on the books (some of which are tax liabilities that can not be discharged, due we have to continue filing returns?
Submitted: 2 years ago.
Category: Tax
Expert:  Lev replied 2 years ago.

Hi and welcome to Just Answer!

Because your LLC was classified as a partnership - it files a partnership tax return on form 1065.

According to instructions - www.irs.gov/pub/irs-pdf/i1065.pdf

Entities formed as LLCs that are classified as partnerships for federal income tax purposes must file Form 1065.

 

You need to decide if you want to keep a partnership or not. If the partnership closed - you need to file a final tax return - check the box final in the header of the form - and all assets including payable and receivable - should be distributed to partners.

Those receivable that you will never collect - are treated as bad debt and may be deducted. Receivables that you will not pay - are included into your income.

The balance - either gain or loss - is distributed to partners on K-1's and is reported on individual tax returns of each partner.

All liabilities that may not be discharges (including tax liabilities) of the partnership are passed to partners - and will be in effect unless paid off or expired because of the statute of limitation or forgiven.

 

That might be the best to clean up all your business issues - and you will be able to create a new LLC if you will start the business again.

You would also need to dissolve the LLC in the state where it was registered.

In Connecticut - here is information you need - http://www.ct.gov/drs/cwp/view.asp?a=1454&q=266104

Let me know if you need any help.

Customer: replied 2 years ago.
So my ending capital account balance on the return will be zero as will all other balance sheet accounts (though those aren't shown on the account). How do I show that I have a personal liability and now if I am responsible for paying debt that will not be discharged through the bankruptcy, I get not tax benefit from that? Because of eliminating all the other payables, I show net income. If the payables were shown as adjustments to capital instead of income, wouldn't I be better served because I would show a loss? And if the actual discharge occurred after the closing of the business if we are saying a shortened year, can I not show it as income? It justs doesnt seem to make sense that I am personally responsible for this debt, lost money in the company and then am still going to owe taxes.
Expert:  Lev replied 2 years ago.

So my ending capital account balance on the return will be zero as will all other balance sheet accounts (though those aren't shown on the account).

That is correct - after all remaining assets are distributed - the ending balance should be zero.

How do I show that I have a personal liability and now if I am responsible for paying debt that will not be discharged through the bankruptcy, I get not tax benefit from that?

You do not need specifically "show" you personal liability - all assets and debts are passed to you on K-1.

Because of eliminating all the other payables, I show net income. If the payables were shown as adjustments to capital instead of income, wouldn't I be better served because I would show a loss?

If payable may not be collected - that is a bad debt and is written off and deducted (if previously was included into income). If that resulted a business loss - it is passed to partners on K-1.

And if the actual discharge occurred after the closing of the business if we are saying a shortened year, can I not show it as income?

Yes - if the account payable is distributed to you from the partnership - that is your income when collected.

It justs doesn't seem to make sense that I am personally responsible for this debt, lost money in the company and then am still going to owe taxes.

A partnership is the relationship existing between two or more persons who join to carry on a trade or business. A partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Instead, it "passes through" any profits or losses to its partners.

So - whatever business losses the partnership has - these losses are passes to partners.

Customer: replied 2 years ago.
sorry, one last question. So if it is recourse debt (we are still liable for the expense even if the business closes) then it goes as an M-2 adjustment to capital (debit accounts payable credit owners equity/capital) and therefore would not be income (debit accounts payable and credit other income)?
Expert:  Lev replied 2 years ago.
If the partnership took a loan - the partnership is legally responsible to pay it back.
If these obligations are on LLC members or not - that is a different issue - and that is a legal not tax issue.
However - you may not simply close the business without dealing with loan obligations. If the partnership may has no funds to pay - it should either negotiate or file for bankruptcy protection.
If you simply close the business - debt is passed to partners.
If the debt is forgiven - the forgiven amount will be included into income and will reduce losses.

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