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I want to convert $200K of traditional IRA to $200K of Roth…

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Hi. I want...

Hi. I want to convert $200K of traditional IRA to $200K of Roth IRA in 2017. I have a K1 $150K loss in 2017. Will my AGI be affected in this way $200K - 150K = 50K added to AGI for 2017?

Accountant's Assistant: The Accountant will know how to help. Is there anything else the Accountant should be aware of?

I also own an S Corp. I don't know if this helps.

Submitted: 7 months ago.Category: Tax
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12/1/2017
Tax Professional: Mark Taylor, Certified Public Accountant (CPA) replied 7 months ago
Mark Taylor
Mark Taylor, Certified Public Accountant (CPA)
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Hi, my name is Mark. I will be happy to help you with your questions. Can you tell me more about the K-1. What type of entity is this (LLC or S-Corporation)?

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Customer reply replied 7 months ago
Strategic Energy Assets V, LLC (It's considered real estate, but it's an oil and gas investment) It generates a K1.
Customer reply replied 7 months ago
K1 loss for business expenses.
Tax Professional: Mark Taylor, Certified Public Accountant (CPA) replied 7 months ago

Are you an active member of the LLC? Are you active in the operations of the LLC?

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Customer reply replied 7 months ago
No, I'm not an active member. They've found a way to deliver K1's.
Tax Professional: Mark Taylor, Certified Public Accountant (CPA) replied 7 months ago

Will you still have ownership in the LLC after this year?

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Customer reply replied 7 months ago
The question is... if the 2017 K1 loss will offset taxes to be paid for the $200K roth conversion in 2017?
Customer reply replied 7 months ago
I will still have ownership(investment interest) in 2018.
Tax Professional: Mark Taylor, Certified Public Accountant (CPA) replied 7 months ago

The questions that I ask are trying to determine this. To be able to claim a loss on the K-1 you need to have basis. The basis would be determined by your initial investments plus profits of the LLC less any losses, Plus any loans that you would be responsible.

Next you would need to consider whether the loss is active or passive. If the loss is passive, you would only be able to apply the loss against other passive income. You would not lose the loss, it would just be suspended and carry forward to the next year. You would be able to free up the loss if you dispose of the investment.

From your description it sounds like this is a passive loss and would not decrease your AGI in the current year. It would be suspended until applied to other passive income or until the investment is disposed.

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Customer reply replied 7 months ago
The k1's work against regular income. I just need to know if the K1 will be subtracted from traditional to roth ira conversion.
Customer reply replied 7 months ago
It's classified as an "Active loss".
Customer reply replied 7 months ago
I just instant messaged the firm.
Customer reply replied 7 months ago
I will have a personal liabilities for all liabilities of the company. Does this make it "active?"
Customer reply replied 7 months ago
I am actually purchasing LLC interest.
Customer reply replied 7 months ago
Does this help anything?
Tax Professional: Mark Taylor, Certified Public Accountant (CPA) replied 7 months ago

Here are the test to consider if it would be considered active income.

  • You participate in the business for more than 500 hours.
  • Your participation in the activity constitutes substantially all of the participation of all individuals and employees.
  • You participate in the business for more than 100 hours and no other individual or employee participates more hours than you.
  • The activity is a Significant Participation Activity and you participate for more than 100 hours and your annual participation in all significant activities is more than 500 hours.
  • You materially participated in the activity for any 5 years during the 10 immediately preceding years.
  • If you are engaged in personal service activity, the test is that you must have materially participated for any 3 years preceding the current year.
  • Based on all facts and circumstances, you participated on a regular, continuous, and substantial basis during the year.
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Customer reply replied 7 months ago
If I hold an active interest, would a K1 loss be completely subtracted from my AGI?
Tax Professional: Mark Taylor, Certified Public Accountant (CPA) replied 7 months ago

If it is not active it would be considered a passive loss. A passive loss can only be applied to passive income. The IRA conversion would not be considered passive income. If there is no passive income, the passive loss is suspended and would carry forward until either their is passive income or until the investment is disposed of.

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Customer reply replied 7 months ago
I understand a passive loss. Is the treatment different for an active loss?
Tax Professional: Mark Taylor, Certified Public Accountant (CPA) replied 7 months ago

Yes, with an active loss there as long as you have basis (at risk) you would be able to claim the loss without limitation. So this would decrease your AGI.

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Tax Professional: Mark Taylor, Certified Public Accountant (CPA) replied 7 months ago

So to be able to claim the loss you need to have at risk (basis) and the investment needs to be active.

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Customer reply replied 7 months ago
I work for the company is a sales and marketing capacity. I didn't know that it was important.
Customer reply replied 7 months ago
I work for the company is a sales and marketing capacity. I didn't know that it was important.
Tax Professional: Mark Taylor, Certified Public Accountant (CPA) replied 7 months ago

Are you paid as an employee?

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Customer reply replied 7 months ago
Are there any restrictions that I couldn't use the K1 loss to offset the $200K increase from the IRA conversion?
Tax Professional: Mark Taylor, Certified Public Accountant (CPA) replied 7 months ago

The only restrictions are the at risk and passive activity rules.

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Customer reply replied 7 months ago
Paid via 1099.
Customer reply replied 7 months ago
Can I deduct the whole $150 K1 loss against the $200K increase in AGI from the ira conversion? (in this senario?)
Tax Professional: Mark Taylor, Certified Public Accountant (CPA) replied 7 months ago

It sounds like you are participating in the activities of the LLC. They should be paying you are a guaranteed payment. Tax treatment would be treated similarly.

IF you are active in the sales and marketing of the LLC then as long as you meet the at risk rules. (You have a positive capital account on the K-1 + the amount of loans that you are responsible), you would be able to apply the loss to the IRA conversion.

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Customer reply replied 7 months ago
considering it's an active loss...
Tax Professional: Mark Taylor, Certified Public Accountant (CPA) replied 7 months ago

If it is considered active and you have at risk then yes it would reduce your AGI.

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Customer reply replied 7 months ago
Thank you! I wanted to be really clear.
Tax Professional: Mark Taylor, Certified Public Accountant (CPA) replied 7 months ago

Sorry for the questions, I just want to give you the two prongs that you need to satisfy. I hope this helped. If you would take a moment to rate my response I would greatly appreciate it. There should be stars located above the question. If you have additional questions or need clarification I would be happy to continue the discussion. Thank you.

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Customer reply replied 7 months ago
Mark, it is considered equity in the company and not a loan. What does this do?
Customer reply replied 7 months ago
Does this change the active status and deductiblity?
Customer reply replied 7 months ago
I messaged the company to get how it's listed.
Customer reply replied 7 months ago
Does active equity risk count in the same way as a loan?
Tax Professional: Mark Taylor, Certified Public Accountant (CPA) replied 7 months ago

I just want to make sure that I understand your question. I am assuming that you did not contribute cash capital but did agree to loan for your share of the interest?

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Customer reply replied 7 months ago
I will be investing $200K cash from my IRA.
Tax Professional: Mark Taylor, Certified Public Accountant (CPA) replied 7 months ago

Who is going to be the member of the LLC? You or the IRA?

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Customer reply replied 7 months ago
Me.
Tax Professional: Mark Taylor, Certified Public Accountant (CPA) replied 7 months ago

If it is going outside of the IRA it would be a taxable event. So the $200,000 would be taxable income. Is this separate from the conversion?

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Customer reply replied 7 months ago
IRA Services Trust Company CFBO ***** ***** Shilka IRAXXXXXX
Customer reply replied 7 months ago
I am converting $200K from traditional ira into a new $200K roth IRA.
Tax Professional: Mark Taylor, Certified Public Accountant (CPA) replied 7 months ago

Is it a loan from the IRA?

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Customer reply replied 7 months ago
this is the taxable event
Customer reply replied 7 months ago
No, it's not a loan.
Tax Professional: Mark Taylor, Certified Public Accountant (CPA) replied 7 months ago

I am sorry I think that I am missing something. So the $200K is converted from a traditional IRA to a Roth. How will this be invested in the LLC?

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Customer reply replied 7 months ago
It's a $200K taxable event. I'm trying to figure out if the active K1 loss will directly subtract off of my AGI.
Customer reply replied 7 months ago
I appreciate all your questions. I don't want to find out later that it won't work.
Tax Professional: Mark Taylor, Certified Public Accountant (CPA) replied 7 months ago

I do not want that either.

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Tax Professional: Mark Taylor, Certified Public Accountant (CPA) replied 7 months ago

Let's start with this scenario. You take the $200,000 out of the IRA and contribute it to the LLC. You would be able to claim the loss but you would need to pick up the $200,000 as income (same as a conversion) but there would also be a 10% penalty ($20K) if you are under the age of 59 1/2.

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Customer reply replied 7 months ago
$200K is "Purchase of LLC Interest."
Tax Professional: Mark Taylor, Certified Public Accountant (CPA) replied 7 months ago

It sounds like the LLC is purchasing the interest.

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Customer reply replied 7 months ago
No. I would be purchasing the interest. I am 46. It sounds like the 10% penalty is the show stopper.
Tax Professional: Mark Taylor, Certified Public Accountant (CPA) replied 7 months ago

I would agree. For you to purchase the interest, there would need to be a distribution from the IRA.

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Customer reply replied 7 months ago
Thanks!
Tax Professional: Mark Taylor, Certified Public Accountant (CPA) replied 7 months ago

It was my pleasure. I was happy to help. Good luck with everything.

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Customer reply replied 7 months ago
Thank you! I appreciate all your responses!Enjoy your weekend!
Tax Professional: Mark Taylor, Certified Public Accountant (CPA) replied 7 months ago

You too.

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Tax Professional: Mark Taylor, Certified Public Accountant (CPA) replied 7 months ago

If you could take a moment to rate my response I would greatly appreciate it. Thank you.

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Customer reply replied 7 months ago
HI. It's me again. Are you sure that I'd need to pay a 10% penalty even if it is in a roth ira?
Customer reply replied 7 months ago
I can't see anywhere that there is a penalty for putting it into a roth ira.
Customer reply replied 7 months ago
Based on our whole conversation, it seems like it would work out for me.
Tax Professional: Mark Taylor, Certified Public Accountant (CPA) replied 7 months ago

No, there is no penalty for putting the money into a Roth. The problem that I see is the money is going from the IRA and you have the ownership individually.

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Customer reply replied 7 months ago
Both the traditional ira and the roth ira are owned individually.
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