Negative Partner Capital balance on K-1

Negative capital account doesn't matter, but he must have basis enough to absorb the loss.  You HAVE been tracking basis, haven't you?  Oh, and he must also meet the at-risk threshold.

Yes, in general, the capital account shown on the K-1 is on GAAP basis.  Was the loss on the investment as a result of a disposition or a book accounting adjustment?  Are you just curious about negative capital accounts or does your partner have a tax loss for the year?

What really matters is their tax basis.

See treas. reg.1.705-1  http://edocket.access.gpo.gov/...

Keep in mind that a partner in an LLC doesn't get tax basis for liabilities unless that partner made the loan.

It would have helped to know from the git-go that it was passive income.

Tax basis, at-risk rules and passive activity rules are three separate hurdles that a partner must overcome in order to take a tax loss. 

If your partner doesn't have enough tax basis to take a loss, then it is suspended before you even get to the passive activity rules.

How was the loss funded - whose money did the partnership lose?  If your partner put in 10K and there is a 17K loss coming out, where did the other 7K come from?  If your guy doesn't really bear the economic risk of loss, he won't get the deduction.

I think this is getting beyond the scope of what we can address here.

TX_CPA,

First of all, welcome, you're my favorite New Member this month!

>>>>Keep in mind that a partner in an LLC doesn't get tax basis for liabilities unless that partner made the loan.<<<<

I know this is true for S Corps but I didn't think it was true for LLCs taxed as partnerships.  Not anything pressing but I wouldn't mind seeing a cite for this after 4/15.

Thanks,
Rick

PS: Looks like the allure of this forum wore off for some people!

 You get basis, but not at-risk, for nonrecourse debt.  You get basis and at-risk for recourse and qualified non-recourse debt.

Your capital account may or may not have anything to do with your basis, regardless of which of the boxes are checked for method of determining capital account.  "Tax basis" means "capital account calculated using tax rules," not "this amount is your basis for tax purposes."

rbynaker - thanks for the welcome!  I misspoke about tax basis and a LLC's liabilities, Phoebe is correct, it's the at-risk rules that can trap an LLC member's tax loss with nonrecourse liabilities.

TX, You'll find that Phoebe is always correct. :)  If I pick up any of these annoying complicated partnership clients, I'm sending them to her (she just doesn't know it yet!)

Rick

And trusts.  Phoebe knows everything about trusts.

I second Rick's emotion, TX.  You have the two indispensable attributes for this list - a sense of humor and thick skin.  Some minimal knowledge of taxes is nice too, but not required.