robin-tylim
Level 1
12-07-2019
08:35 AM
- Mark as New
- Bookmark
- Subscribe
- Permalink
- Report Inappropriate Content
Should my client who is a single member LLC, (but has an investor who's loan is repaid when the business is sold for a portion of the sales proceeds) file a 1040 or a Partnership return? Can the investor who gets zero share of profits and losses until sale have a basis on the K1s?
Best Answer Click here
Labels
sjrcpa
Level 15
robin-tylim
Level 1
12-07-2019
08:35 AM
- Mark as New
- Bookmark
- Subscribe
- Permalink
- Report Inappropriate Content
The client is stating it's a loan but when the business gets sold it gets repaid for a higher amount. I'm not sure what is needed to document that it's a loan versus capital contribution
sjrcpa
Level 15
12-07-2019
08:35 AM
- Mark as New
- Bookmark
- Subscribe
- Permalink
- Report Inappropriate Content
A loan agreement would document a loan.
Ex-AllStar
Ex-AllStar
itonewbie
Level 15
12-07-2019
08:36 AM
- Mark as New
- Bookmark
- Subscribe
- Permalink
- Report Inappropriate Content
The documentation you need is similar to what it would have been required for a loan from an unrelated third party.
You should not rely on what the parties call it but review the document for intent, whether it was a bona fide loan that was evidenced by documentation, whether the terms are comparable to those in the market, enforceable, and were actually carried out, whether interest is chargeable at AFR at a minimum, and how the related transactions were recorded on the books. You should be able to trace back from the documentation and the books what the difference is.
You should not rely on what the parties call it but review the document for intent, whether it was a bona fide loan that was evidenced by documentation, whether the terms are comparable to those in the market, enforceable, and were actually carried out, whether interest is chargeable at AFR at a minimum, and how the related transactions were recorded on the books. You should be able to trace back from the documentation and the books what the difference is.
---------------------------------------------------------------------------------
Still an AllStar
Still an AllStar
robin-tylim
Level 1
12-07-2019
08:36 AM
- Mark as New
- Bookmark
- Subscribe
- Permalink
- Report Inappropriate Content
If there was adequate documentation of a loan and proper booking in the books then is a partnership return still necessary or is a 1040 okay? What about interest on the loan? Shouldn't that be a taxable item?
robin-tylim
Level 1
12-07-2019
08:36 AM
- Mark as New
- Bookmark
- Subscribe
- Permalink
- Report Inappropriate Content
If there was adequate documentation of a loan and proper booking in the books then is a partnership return still necessary or is a 1040 okay? What about interest on the loan? Shouldn't that be a taxable item?
sjrcpa
Level 15
12-07-2019
08:36 AM
- Mark as New
- Bookmark
- Subscribe
- Permalink
- Report Inappropriate Content
If it is a bona fide loan then you have a Single Member LLC. It is disregarded for income tax purpose unless an election was made to be taxed as a corporation.
A partnership, by definition, has two or more partners.
Ex-AllStar
A partnership, by definition, has two or more partners.
Ex-AllStar
itonewbie
Level 15
12-07-2019
08:36 AM
- Mark as New
- Bookmark
- Subscribe
- Permalink
- Report Inappropriate Content
:+1:
---------------------------------------------------------------------------------
Still an AllStar
Still an AllStar
TaxMonkey
Level 8
12-07-2019
08:36 AM
- Mark as New
- Bookmark
- Subscribe
- Permalink
- Report Inappropriate Content
And what happens if the business is not sold for a profit, and or if the loan is not repaid?
abctax55
Level 15
12-07-2019
08:36 AM
- Mark as New
- Bookmark
- Subscribe
- Permalink
- Report Inappropriate Content
If this IS a partnership, then have the client provide a copy of the partnership agreement. Which, *should* document the capital contributions.
*The client says* isn't really good enough documentation for your file....
"*******Tax software is no substitute for a professional tax preparer*******
( Generic Comment )"
( Generic Comment )"
IRonMaN
Level 15
12-07-2019
08:36 AM
- Mark as New
- Bookmark
- Subscribe
- Permalink
- Report Inappropriate Content
Well it is good enough for me if his name is Simon :grimacing:
Slava Ukraini!
Slava Ukraini!
Accountant-Man
Level 13
12-07-2019
08:36 AM
- Mark as New
- Bookmark
- Subscribe
- Permalink
- Report Inappropriate Content
Is there interest stated on the loan? Is the repayment at sale the loan plus interest?
** I'm still a champion... of the world! Even without The Lounge.