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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.
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.