K-1 tax question?

[NAUgrad]

Okay, so 2 years ago I made a stupid investment that has cost me dearly. I'm going to sum up what happened, but I'm really unclear as to if my accountant did my tax return correctly last year. Any help anyone can provide would be great.

 

I made an investment into a company that I was an active manager in. Let's say the amount was $10K, (this was in '07). After 6 months with the company I left in December of '07 (mostly because the principle owner lied to me and I could no longer trust him). I received a K-1 for '07 that showed a loss of $7K. I believe this is a pass through loss (I think that's right). My accountant took the full amount of the K-1 to lower my taxable income amount. We did receive money back, but not as much as I expected.

 

When I made the investment, I acquired shares in the company. I'm about to sell these shares back to him for $7K which should be a loss of $3K. However, I should also get another K-1 for 2008 and after selling the shares back I should also be able to take that loss as well (I think).

 

I may be way off on this as I'm a little confused on how a K-1 should work. One person told me that I can only use the K-1 loss against any gains, but that doesn't appear to be what my accountant did....

 

Any thoughts?

[BYoder]

The $10K that you originally invested is your basis. The $7K loss that you took for 2007 reduced that basis to $3K. Your 2008 loss will also reduce your basis. Keep in mind that your basis cannot go below $0 so you will be able to deduct a max of $3K for 2008. Any loss above that is suspended and carried forward until you have a income. You may be able to deduct this loss in 2009 since you are selling your shares but you will need to check with your accountant on this.

Also, I believe the $7K sale of stock will be a capital gain for you. The amount will depend on what your basis is and we would need to know your 2008 gain/loss before that can be determined.

[NAUgrad]

The $10K that you originally invested is your basis. The $7K loss that you took for 2007 reduced that basis to $3K. Your 2008 loss will also reduce your basis. Keep in mind that your basis cannot go below $0 so you will be able to deduct a max of $3K for 2008. Any loss above that is suspended and carried forward until you have a income. You may be able to deduct this loss in 2009 since you are selling your shares but you will need to check with your accountant on this.

Also, I believe the $7K sale of stock will be a capital gain for you. The amount will depend on what your basis is and we would need to know your 2008 gain/loss before that can be determined.

Okay, so basically if I get my money back, or at least part of it, then it's pretty much going to be a wash tax wise. The loss the company had over the past 2 years will not benefit me when I receive the cash. Does that sound right?

[BYoder]

Okay, so basically if I get my money back, or at least part of it, then it's pretty much going to be a wash tax wise. The loss the company had over the past 2 years will not benefit me when I receive the cash. Does that sound right?

It really will depend on what the capital gains tax rate is for 2009. In the past the capital gains tax rate has been 15% which is lower than your regular income tax rate. I haven't paid much attention so I don't know if the rate is going to increase for 2009 but I thought it was supposed to stay at 15%. So in the past you deducted losses at your regular tax rate and now when you report income from the sale you will pay tax on the sale at 15%. So you will benefit from the difference between your tax rate and the 15% capital gains rate. It may be a small amount but it isn't exactly a wash.

 

Back to your original post, imo your accountant was correct in the way that he deducted your loss.