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Stephen G.
Stephen G., Sr Income Tax Expert
Category: Tax
Satisfied Customers: 6703
Experience:  Extensive Experience with Tax, Financial & Estate Issues
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Company A (LLC taxed as a partnership) brings in net revenue

Customer Question

Company A (LLC taxed as a partnership) brings in net revenue of $1,000 from an asset sale.Company A purchases debt (convertible notes) issued by Company B (a private company) from several noteholders of Company B. Company A's cost basis for all the notes is $1,000.In the same tax year, Company B becomes insolvent and the debt/notes become uncollectible, so Company A writes off the notes as bad debt (or worthless securities -- whichever is applicable in this case) and takes the deduction.Does Company A end up with a net negative tax obligation, or a zeroed-out tax obligation? In other words, because of the $1,000 loss due to the bad debt, do Company A partners get to take a total $1,000 NOL to apply against their tax obligation, or is it zeroed out because of Company A's $1,000 in income?Further, is the bad debt / worthless security deduction limited to the actual cost paid by Company A for the notes, or can the full amount of the notes themselves be deducted? For example, if the principal on a note is $5,000, but Company A only paid $1,000 for that note, could Company A write down the full $5,000 "asset value" of the note, or just the $1,000 it spent to purchase the note?Thanks so much!
Submitted: 5 months ago.
Category: Tax
Expert:  Stephen G. replied 5 months ago.

Hello, my name is***** goal is to give you a complete & accurate answer. I am working on your request now & I will respond as soon as possible.

Expert:  Stephen G. replied 5 months ago.

First of all, you need to provide a rating for my response to your first question with the Hypothetical, before I respond to this question.

Thanks very much; in the meantime, I will work on this question and stand by.

Steve G.

Customer: replied 5 months ago.
Done! Thanks
Expert:  Stephen G. replied 5 months ago.

I'm at a loss to understand why you think that the Partnership can in effect disregard the taxable profit from an "asset sale" in order to pass through the loss on worthless securities to the partners?

Again, I am presuming that the $1,000. from the asset sale represents the net profit from the sale of a business asset, that in your example has been fully depreciated.

In this second example, the Partnership's tax basis in the notes would be the purchase price of the notes, or $1,000. That would be the maximum tax loss that would be generated if the notes became uncollectable or worthless as the case may be. The face value of the notes would only be relevant if the notes were collected, which is obviously not the case here.