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Partner return or 1040?

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Level 1

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?

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Level 15

Is "investor"'s money a loan or a capital contribution?


ex-AllStar

View solution in original post

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Level 15

Is "investor"'s money a loan or a capital contribution?


ex-AllStar

View solution in original post

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Highlighted
Level 1
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
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Level 15
A loan agreement would document a loan.

ex-AllStar
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Level 15
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.
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Still an AllStar
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Level 1
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?
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Highlighted
Level 1
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?
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Highlighted
Level 15
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
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Level 15
:+1::+1:
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Still an AllStar
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Level 8

And what happens if the business is not sold for a profit, and or if the loan is not repaid?

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Level 15

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....

Former Chump... umm.... AllStar.
If a post answers your question, click on *Accept as solution* for future searches
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Level 15
Well it is good enough for me if his name is Simon :grimacing::grimacing:
ex-AllStar, ex-Lutefisk taste taster, ex-ACME product tester
and ex marks the spot where those rocks and anvils hit me.
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Level 11

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.
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