Treatment of Partnership Suspended Losses Upon Dissolution

[peauff]

I have a client who changed their LLC from Multi to single member in 2021.  On their 2020 Partnership return they had losses that were suspended due to insufficient basis.  Do they need to file a "final" partnership return in 2021 to pass these down to the remaining owner's schedule C?

[sjrcpa]

Same client?

https://proconnect.intuit.com/community/lacerte-tax-discussions/discussion/treatment-of-partnership-...

[peauff]

Yes.  This is the second part of my question, the first being treatment of the dissolved partnership (with respect to form 8832) and the second, what happens to the suspended loss if we file as a disregarded entity in 2021?  I have seen mixed info, some say it becomes fully deductible by the remaining LLC member, some say you lose it.

[sjrcpa]

You can't deduct anything if you don't have enough basis.

How did the 2 member LLC become 1 member? Gift from one spouse to the other?

[PhoebeRoberts]

Regarding the need for a final 1065: yes, and it's entirely possible that it's already delinquent.

[peauff]

How this began; I advised the client that as they were not concerned about having joint ownership of the LLC, that they could file amended org paperwork removing 1 member, thus saving them the complexity and expense of filing a partnership for 2021.  It was too late to do this for TYE 2020, and so we filed that year as a partnership, with very little owners basis, primarily expense that then flowed to suspended losses above basis.  I then filed the 8832 (a few months ago) as I wanted to request change in current classification and late classification relief to set an effective date of the new disregarded entity at 1/1/21, instead of the date they filed the org amendment (around October 2021).  I agree that there has to be some monetary change of hands (perhaps $1?) to signify ownership change; this would be noted in the Org. documents maintained by the partnership.  So if this works and we file a schedule C for the remaining owner for 2021, can the suspended loss from the Partnership be noted on this return to allow it to move forward for potential future offsets to passive income?  Also, do we file a Partnership return for 2021 identified the Partnership as dissolved?

[sjrcpa · Accepted solution]

There is no gain or loss on transactions between spouses.

Spouse who remains LLC member gets departing spouse's basis of -0-.

I think the LLC member spouse also gets the departing spouses's losses in excess of basis, but am not 100% sure.

[PhoebeRoberts]

The LLC became a disregarded entity automatically when the ownership changed from one person to two people. If that was in October 2021, the final 1065 is due on the 15th of the 3rd month, November December January: tomorrow by which I mean Tuesday 1/18. The penalty for being late in filing a two-member LLC 1065 is $420 a month. File the short-year extension request today.

No 8832 was necessary or appropriate (but also not harmful), and the effective date can't be any date other than the date of the ownership change.

I agree with Susan; no money needs to change hands and no gain or loss is recognized. Suspended passive losses with sufficient basis would adjust basis upwards; losses suspended for lack of basis are lost and gone forever, dreadful sorry Clementine.  So you can ignore the out-spouse's basis losses. The in-spouse's basis losses attach to the new Sch C activity. (I do question how you get a two-spouse partnership LLC with basis limitations, because that money came from somewhere, but that's an entirely different issue.)

[peauff]

What would be the purpose for the late classification relief option on form 8832 if it is not available in this scenario?  Thanks for the insight on suspended losses.  The small amounts of basis attributed to each spouse represented monies invested into the partnership by each of them.

[PhoebeRoberts]

The 8832 is used for a bunch of situations where it is applicable. It just doesn't happen to be applicable in this situation.

If the LLC paid $500 of expenses, and the spouses put in $100 each, where did the money to pay for the remaining $300 come from?

[peauff]

Org change was made 12/21/21.  Depreciation accounts for expense in excess of cash contributed.

[PhoebeRoberts]

I personally find it unlikely that a husband-wife LLC managed to secure non-recourse financing on some depreciable asset. And even then, they've got basis - what you have is a loss suspended for lack of at-risk.