A few years ago I invested in (and went to work for) a start-up LLC with a lot of momentum and potential. Unfortunately, there weren’t enough sales to keep it going and I was laid off, and my investment became essentially worthless.
Additionally, I can’t even write off my investment for taxes. The company’s founder still keeps the LLC alive on a part-time basis, and it does still have some assets left and never officially folded. But as the LLC is basically dead (no employees for 2+ years; virtually no chance of recovering) the shares I bought are essentially worthless.
Is there anything I can do to at least show the loss for tax purposes, even though (on paper) my share of the company is still worth thousands of dollars? Also, because there’s only 1 employee left (the founder) who works on behalf of the company anymore, it’s a struggle each year to even get a Schedule K-1 from the LLC to do my taxes (don’t have one yet this year). What should I do if I don’t receive a K-1?
NOE
Comments
If the loss was significant, I would contact an attorney and force the LLC into bankruptcy. If it’s below the small claims ceiling, I would take them to court and demand liquidation of the LLC’s assets. If it’s really a small amount, I would just forget about getting any money out of it and write off the basis on Schedule D (which I would do anyway, since what you will receive is minimal and doubtful.) You are limited to $3000 per year for the write off.
You should demand a K1. In all likelihood, there is a loss that could come in handy for your taxes. If the remaining employee doesn’t want to come up with one, turn him into the IRS.
If the business has had losses for a couple of years, this should have been reported to you on your K-1 every year. You would already have had a tax benefit by claiming these losses every year. If you’re saying that you never received a K-1, then thats negligence on the part of the owner. You should receive a K-1 every year until the LLC is dissolved. On your final K-1 you would report a gain or loss depending if you have any basis. If the business tax returns went on extension, then you will have to file an extension for your personal tax returns also.
As far as the K-1 goes, you should file for the automatic extension. You still have to estimate what you think you owe and make sure you are paid up because you will be penalized if you have under withheld. Now this doesn’t help you if you have a refund forthcoming that you would like to collect ASAP. I think in that case you should file it as is and file an amendment when you get the K-1.
As far as showing that your investment is constructively a loss, I am not sure what the rules are. Perhaps one thing you could try and do is get the founder to buy the shares back for a nominal amount like $1 because then you would have realized the loss. It would also solve your K-1 problem going forward.
What you essentially have here is a Internal Revenue Code Section 1244 loss. You can only report the Section 1244 loss in the year the shares become worthless.
The Section 1244 loss is created when a shareholder, or partner in this case,
contributes loans to an entity, and quite often these loans are converted to an
equity position in that entity.
The biggest tax benefit of claiming a Section 1244 loss is that it is an “ordinary loss” that can be applied to your “earned income”; whereas
“worthless stock” is considered a “capital loss” subject to the $ 3,000 limitation.
My suggestion is that you do a little research. Go to irs.gov and search for Section 1244.
See if any of the examples they provide apply to you.
Also, check out the below website to find out how you can save money on your filing expenses this year as well…
