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PDtax, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 4516
Experience:  35 years tax experience, including four years at a Big 4 firm.
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I am filing a final return LLC that was closed during tax

Customer Question

I am filing a final return for an LLC that was closed during tax year 2015. Initially, three members contributed $5000 each into their capital accounts and the total 15K was spent on administrative type expenses while we explored the potential for the business opportunity. There has never been any income to report.
Question: How do I reflect the capital accounts on the final return? Should each continue to reflect the members cash that they can claim as a loss individually, or does the loss need to be reflected by resetting the capital accounts to zero on the final 1065?
Submitted: 1 year ago.
Category: Tax
Expert:  PDtax replied 1 year ago.

Hi from Just Answer. I'm PDtax. I'll assist.

The final reporting depends on how the activities were reported previously. It sounds like the business never started, that the $$ was spent on investigation, rather than startup expenses.

If you are filing a final return, i would expense the administrative type expenses on the final return, and pass through the loss to each LLC member. They can then report the final LLC loss and their gain or loss on their investments separately.

I suggest that because the funds are gone, spent. That changes the treatment of expenses you incurred without starting up your business. Now the $$ spent should be expensed, since the funds have ben spent and the business is no longer in 'startup' mode.

Thanks for asking at Just Answer. Please rate my assistance using the star scale you'll see on your screen. I'm PDtax.

Customer: replied 1 year ago.
Thank you for your reply - but it did not address my actual question. The question was specific to how to reflect the capital accounts on the 1065 & K1. The starting account for each member is $5,000. Should the final 1065 reflect $5,000 representing the capital contribution that would be written off as a loss on the individual 1040s? Or, should the 1065 (and subsequent K1s) reflect a zero balance in the capital accounts?
Expert:  PDtax replied 1 year ago.

If you report the loss, the capital accounts will reflect the loss passthroughs for each.

Let's say you expense $14,700 expended on the final LLC return. The capital accounts for each would be $5,000 less their share of the $14,700 spent. The final balance sheet could then show $300 in cash, and $300 in total member equity.


Customer: replied 1 year ago.
OK. That all makes sense and I appreciate the answer. But here is a bit of potential complexity: The capital accounts were funded with expenses incurred individually at the start-up of the LLC. For example, one member made several trips to explore the opportunity and another member incurred attorney expenses to set up the LLC. So - no cash has ever passed through the LLC itself. Our attorneys assured us this was all legit to include in the capital accounts and our operating agreement clearly specifies the amounts credited to each capital account.It has been suggested that the best way to deal with this is to make a loss entry on Line 7 of the 1065 Schedule M2 under the heading of "Final Return Adjustment." Your suggestion of writing off the loss as an ordinary loss makes sense if the expenses were incurred in the ordinary course of business, but is it still appropriate for a situation like ours where the capital accounts reflect individual expenses that were made on behalf of the LLC and contributed at the formation of the entity?I understand that my initial question didn't address this structure - but we were already looking to include the amount as a capital account reduction on the Schedule M2 so my question wasn't looking at the structure of the loss, only the numbers that should be reflected on the return document. Your reply has just brought up the question of if this is, in fact, the appropriate way to deal with the loss of the contributions made to the capital accounts.
Expert:  PDtax replied 1 year ago.

I'm not a fan of an M-2. Treat it as expenses of the LLC, as loans from the LLC members.

If you do, and support the loans with promissory notes or other support, this will create ordinary loss treatment for the expended amounts.

Without the support, you will have nonbusiness bad debts, which will create long term capital losses for the members.

Thanks again. Positive feedback and a bonus if warranted will be appreciated. I'm PDtax.