Author Topic: Tax impact of selling LLC ownership stake at a loss  (Read 358 times)

toganet

  • Stubble
  • **
  • Posts: 204
  • Location: Buffalo, NY
Tax impact of selling LLC ownership stake at a loss
« on: August 07, 2018, 10:40:25 AM »
I'm not sure if this is the right place to ask this, or even the right way to think about the situation, but I figured I would start here.

Situation:  I have a minority stake in an LLC with one other partner.  The business was formed in 2014.  It has consistently operated at a profit, but only by my business partner paying himself as little as possible.  I have not taken distributions from the business, but have recognized the income and paid taxes on it each of the last 4 years.  Now the time has come for me to exit the business, and I'm wondering how those previously-taxed distributions impact my tax burden going forward if I accept a smaller (or non-existent) cash buyout.

To give some context, the total of the distributions would be around $20k, with probably another $5k for 2018.

Much Fishing to Do

  • Bristles
  • ***
  • Posts: 350
Re: Tax impact of selling LLC ownership stake at a loss
« Reply #1 on: August 09, 2018, 12:42:47 PM »
Well, if it was simple then you could start with your initial interest and then track your changing basis off of the income you recognized and paid taxes on each year (whether any of it was distributed to you or not, receiving a distribution just lowers the basis in kind).  But frankly I think it gets too complicated to generalize as there are many times these transactions can (surprisingly) create income as opposed to capital gains, etc, so I wouldn't try to venture a guess as to where you'll come out.

jwright

  • Bristles
  • ***
  • Posts: 262
Re: Tax impact of selling LLC ownership stake at a loss
« Reply #2 on: August 10, 2018, 01:59:40 PM »
The K-1 should track your capital account in Section K (bottom left), depending on the method used there, it may be equal to your tax basis.   You can also track through a basis schedule which some preparers will attach to the K-1.  If you don't have tracking through your K-1, you need to go back to your records and record what you contributed, income, losses, and distributions to determine your basis (you can probably google a spreadsheet that will help with this).  As noted above, other more unusual items may affect your basis as well, and don't forget about nondeductible expenses. 

In the end, if your distributions are less than your basis then you can report a capital loss.  If it is the opposite then you'd have a capital gain.  You'd report it on Schedule D.

toganet

  • Stubble
  • **
  • Posts: 204
  • Location: Buffalo, NY
Re: Tax impact of selling LLC ownership stake at a loss
« Reply #3 on: August 13, 2018, 09:05:09 AM »
Thanks folks, this helps.  I think I have the information I need to calculate my basis in QuickBooks, but ultimately I'll rely on my accountant to do the math.  There's a chance we'll find a buyer or liquidate the business instead, which brings its own set of problems, but makes relying on lawyers and accountants a more straightforward option.