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I need further clarification to a question I asked Megan C

on 9/15/2013. I am...
I need further clarification to a question I asked Megan C on 9/15/2013. I am one of 3 partners in liquidating insolvent partnership LLC. I keep my business books on the cash method basis. The partnership LLC keeps their books on the accrual method with year end adjustments for A/R and A/P. I delayed booking and collecting the cumulative rental income from the Partnership LLC until sustained profitability. Mismanagement of one of my partners drove us into insolvency and bank forced liquidation in 2013. As a partner owed money from this partnership LLC does this disqualify my placing my bad debt, worthless A/R as an ordinary deduction.
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Answered in 7 minutes by:
9/19/2013
jgordosea
jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3,161
Experience: I've prepared all types of taxes since 1987.
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Greetings,

 

Is it possible for you to provide a link or url to the prior answer as it seems you did not use the same account for this and the prior question? Or our search is not working for me?

 

That will likely same time and effort as this answer can be based off that answer.

 

Thank you.

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Customer reply replied 4 years ago

I was JACUSTOMER-fmf6vhac when I talked with megan c of justanswer.tax on 9/15/2013 at around 7:00 pm. I noticed the dialogue was on google.

Is this the conversation?

 

http://www.justanswer.com/finance/8005y-one-three-partners-liquidating-insolvent-partnership.html

 

Regardless of profitability was there a reason these expenses were not accrued to the partnership (you would not have had to report income on the cash basis)?

 

Do the other partners agree that this is a debt of the partnership and is it somehow recorded in partnership records now (even though not on the accounting in the year accrued) ?

 

Were there rental agreements such that this is a transaction not between the partnership and you as a partner but rather between you as a renter of equipment?

 

Even though insolvent will the partnership continue or be dissolved?

 

Have liquidating distributions already been made and if not, will this be part of that computation?

 

Do you understand that whether this is a partnership to partner transaction such as an investment or whether this is a transaction with you in a capacity not as a partner may decide the issue but that is based on the facts and circumstances in your case so that a definitive answer is not likely possible in this venue ?

 

Do you want Megan to clarify or another expert?

 

Thank you for the information.

 

 

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Customer reply replied 4 years ago

yes I think that is the conversation. The expenses were not accrued to the partnership because the rental use was ongoing in establishing the nursery site. The partners know that these rental costs are owed by the partnership because I have provided them with cumulative costs listing each piece of equipment and time used. There were no formal rental agreements but the partners knew I owned the equipment and rented equipment to the partnership as well as other farmers. This is a handshake farming community. No, this partnership will not continue and will be dissolved by year end. There will be no liquidating distributions. We are insolvent with no liquid assets. Our bank debt has been paid off. I would like megan c to clarify if you can not provide a definitive answer.

Megan C
Megan C, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 16,592
Experience: Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
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Hello! I am a CPA here to assist you with your tax questions. My goal is to provide you with excellent service today.

What information would you like me to clarify? If you are in the business of equipment rental, and the partnership rented equipment from you, then you have a business bad debt if the partnership does not pay you, and you can deduct your expense in full on your tax return.

There should be some sort of rental agreement in the best circumstance. In absence of the rental agreement, in the event of an audit you will need to substantiate that you did incur these costs. If you have records this can prove it.

If you need anything additional, please let me know. If not, please rate this response as "excellent" so that I may receive credit for assisting you today.
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Customer reply replied 4 years ago

Megan: did you read my question today. I asked that because I use the cash basis for my books, does this invalidate taking an ordinary deduction because I did not record this A/R in my previous tax returns.

However, I will add that if you are a cash basis taxpayer, you cannot take the deduction, because you cannot deduct amounts that were not previously reported as income.

I'm sorry if I did not clarify this initially. If you have no income, then there's no bad debt to deduct. Unfortunately you would not be able to take this deduction.

Thanks again for being a valued JustAnswer.com customer, and please take a moment to rate my response as "excellent" so that I may receive credit for assisting you today.
Megan C
Megan C, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 16,592
Experience: Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
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Thank you so much for your positive rating. I appreciate the opportunity to further assist you with your question. If there's ever anything else you need, you can put "To Megan C" in the subject of the question, and I will be sure to reply.

Thanks again for being a valued JustAnswer.com customer.
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Megan C
Megan C
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