S CORP PARTNER IN AN LLC

Hi All,

I am getting confused with basis issues and would love your suggestion or opinions on the matter. Thank you in advance for taking the time.

I have an S corporation who is a partner in an LLC. The LLC incurred 100k in losses in 2018 and issued 30k in guaranteed payments to the S corp so the K-1 the S corp received from the LLC is showing 100k in losses and 30k in guarenteed payments. The S Corp put ZERO money in the LLC. My question is the following: based on basis rules, does the S corp not claim the loss (maybe only up to 30k which are the guaranteed payments) and the basis losses get carried over within the S corp or is this done at the S corp Shareholder level? don't think I have had this scenario before and I am getting confused.

Thank you all for your help

Steven

Hypothetically, let's say the owner of the S corp puts 100k into the corporate account. Now let's say the basis in the S corp is 100k as a result. If the basis loss limitation happened at the shareholder level, then we'd be free and clear to claim the entire 100k loss, even though the money is still sitting there in the account. If the shareholder ever feels like accessing the 100k, he can wait a year and withdraw it against his $0 basis, generating long-term capital gains. Can you imagine the potential for abuse if this were actually how things worked?

Of course there are a lot of other factors too, but I hope that simple thought experiment serves to answer your question.

Now, let's address something more important: the presence of the 100k loss on the K-1. Just because it's there doesn't mean it's right. My advice would be to read up on deficit restoration obligations and then contact both the person who prepared the return and someone who understands the LLC operating agreement to make sure everything's on the straight and narrow.

What's the allocated debt on the k1?
That may provide the partner adequate basis to deduct the loss. Might run into at-risk basis limitations though.
Need more info to say.

If no debt allocated, then I think Chay is on the right track. You may have an incorrectly prepared 1065.