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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 12009
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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My partner and I have a LLC and we both paid company debt

Customer Question

my partner and I have a LLC and we both paid company debt this past year out of pocket.
do i report this as a loss on my K-1 or where do i report this expense?
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

Hi,

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I hold a JD (Juris Doctorate, a doctoral degree in the law), with concentration in Tax Law, Estate law & Corporate law, an MBA, with specialization in finance & tax, as well as CFP® and CRPS designations. - I’ve been providing financial & tax advice since 1986.

I can help here

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The LLC is a pass-through (unless you've elected C-Corp taxation) and as a multiple member LLC (probably stating the obvious here) is taxed as a partnership (also a tax pass-through) filing a 1065 (paying no tax at the business level) and providing a k-1 to each partner to use with their personal 1040.

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Likely you know all this, but it provides the foundation for the explanation that the LLC is in many ways, you (better said, your 50% interest in it, is you) ... NOT from a corporate liability perspective, but for TAX purposes.

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If you look back at the time that you (your LLC) received the proceeds of the loan, you'll note that there was no income tax.

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Business taxable income comes from gross receipts from operations MINUS deductible business expanses such as utilities, rent, advertising and loan INTEREST.,,, leaving he entity with a profit or a loss.

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Other than the interest component of a loan the loan's proceeds themselves are not (1) taxable to the receiver of the debt NOR (2) deductible by the lender.

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And when repaid, the payments (or payoff) are (1) not deductible to the borrower and (2) not income to the lender.

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The INTEREST, however, IS a deduction for the borrower and taxable income to the lender (again, probably stating the obvious, but it's the INTEREST that generates income for banks - think of the principal as inventory, and the interest as the profit... from the banks perspective.

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SO, here, although this does increase your tax BASIS in the LLC, (becasue the accounting definition of what you did here is contribute capital for the LLC to pay off it's debts) which will lower the gain on any eventual sale AND allow for a greater amount of any future tax loss to be used ... paying the debt is not a deduction for the LLC or it's members.

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Sorry for the data-dump here ... and sorry to have to deliver something that you may not have wanted to hear ... but I wanted to provide the context,basis, for why this is what it is.

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Please let me know if you have any questions at all

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Lane

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Customer: replied 1 year ago.
it was not a loan it was a direct payment for inventory owed.
Expert:  Lane replied 1 year ago.

In your question younsaid "we both paid company debt this past year..."

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And now you used the word "owed."

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You CERTAINLY get a tax deduction for the cost of the inventory you sold (that's part of the cost of goods sold calculation on your 1065)

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But, so sorry, paying off the loan used to finance the inventory isn't deductible ... (the accounting/tax logic here is that you'd be getting to deduct the inventory cost twice)

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same thing with equipment used in your business ... you get to depreciate that equipment (which is where you get that cost back) but you don't get to deduct the loan payments on the loan used to finance it

Customer: replied 1 year ago.
thanks
Expert:  Lane replied 1 year ago.

You're very welcome ... there are a couple of ways to calculate CGS...

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One that helped me to understand the concept quickly is

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Beginning inventory + Purchases - Ending inventory = Cost of goods sold

Expert:  Lane replied 1 year ago.

ANd here's a good overview of the various methods: http://biztaxlaw.about.com/od/businessaccountingrecords/ht/cogscalc.htm

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Hope this has helped … Please let me know if you have any questions at all.

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If this HAS helped, I'd really appreciate your positive rating … (by using the stars or rating request on your screen) … … That’s the only way JustAnswer will credit me for the work.

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Thank you,

Lane