QUESTION DETAIL
Related User
Votes
In 2012, I formed a new partnership along with 2 others. We each took a 1/3 interest. No capital was contributed as we funded the business with immediate revenue. In 2012, the business issued a few "guaranteed payments" to each of us, but no distributions as we opted to retain revenues for 2013 expenditures. In early 2013, the business went sideways and it stopped generating new revenue. Even though our operating agreement says debts/expenses are shared equally, I put in $2,500 to cover outstanding bills to vendors. Other partners put in nothing. I exercised my right to exit the company on April 1. When I left the business had no cash or real value. As far as I know, the business is just sitting idle and will not generate any new revenue in 2013 to pay back that loan I made. How should that $2,500 be treated for tax purposes? It seems likely that the business will take deductions for the expenses it covered, which I assume would pass through on our K-1s proportional to our ownership interests at the time? Or could I deduct the $2,500 on my personal taxes as non-reimbursable expenses? Can I take the $2,500 as a loss against my 2012 basis?
ANSWER
The BIDaWIZ Team's Answer:
If you contributed $2,500 as a bona-fide loan to the partnership, you bore the risk of loss on the loan. As such it should have increased your basis by $2,500 according to Section 752(a) of the internal revenue code. When the debt is written off as bad debt or since you left the partnership first, there would be a decrease in your outside basis by $2,500 under section 752(b). If you have basis left in the partnership, the $2,500 loss would be taken to the extent of basis. This is reported as a short-term capital loss on Form 1040, Schedule D and requires a separate detailed statement attached to your return. if no basis is left over, no loss. The only other way to claim the $2,500 bad debt to the partnership would be if the debt was converted to equity. If your partners agreed to that, it is possible for you to claim a Section 1244 election, the amount will offset your ordinary income in your personal tax return.
