Question

55.

Danni is a single 30 percent owner of Kolt (a business entity). In the current year, Kolt reported a $1,000,000 business loss. Answer the following questions associated with each of the following alternative scenarios:

a. Kolt is organized as a C corporation and Danni works 20 hours a week as an employee for Kolt. Danni has a $200,000 basis in her Kolt stock. How much of Kolt’s loss is Danni allowed to deduct this year against her other income?

b. Kolt is organized as an LLC taxed as a partnership. Thirty percent of Kolt’s loss is allocated to Danni. Danni works 20 hours a week on Kolt business activities (she is not considered to be a passive investor in Kolt). Danni has a $400,000 basis in her Kolt ownership interest and she also has a $400,000 at-risk amount in her investment in Kolt. Danni does not report income or loss from any other business activity investments. How much of the $300,000 loss allocated to her from Kolt is Danni allowed to deduct this year?

c. Kolt is organized as an LLC taxed as a partnership. Thirty percent of Kolt’s loss is allocated to Danni. Danni is not involved in Kolt business activities. Consequently, she is considered to be a passive investor in Kolt. Danni has a $400,000 basis in her Kolt ownership interest and she also has a $400,000 at-risk amount in her investment in Kolt. Danni does not report income or loss from any other business activity investments. How much of the $300,000 loss allocated to her from Kolt is Danni allowed to deduct this year?

Answer 1

Answer a:

Kolt is organized as a C corporation and Danni works 20 hours a week as an employee for Kolt.

Neither income nor loss of a C corporation passes through the corporation to its shareholders. C Corporation can carry forward “net operating loss” (NOL). When a business is organized as C Corporation, any loss it suffers provides no benefit to its shareholders.

As such Danni is not allowed to deduct any amount of Kolt’s loss this year against her other income.

So share of loss allowed to be deducted = $0

Answer b:

Kolt is organized as an LLC taxed as a partnership.

Danni is a single 30 percent owner and loss allocated = $300,000

The deductibility for her share of allocated loss is limited to:

(i) her adjusted basis in his or her interest in the entity and

(ii) her amount “at risk” with respect to the entity as of the end of the year,

Danni has a $400,000 basis in her Kolt ownership interest and she also has a $400,000 at-risk amount in her investment in Kolt.

Further As per Tax Cuts and Jobs Act,  a taxpayer’s loss from a non-passive trade or business is now limited to $500,000 for MFJ and $250,000 for other taxpayers for tax years beginning after December 31, 2017 and before January 1, 2026.

As such loss she will be allowed to deduct is limited to $250,000 this year. Any excess business loss is treated as part of the taxpayer’s net operating loss (“NOL”) carryforward to be used in subsequent years.

So share of loss allowed to be deducted = $250,000

Answer c:

Danni is not involved in Kolt business activities. Consequently, she is considered to be a passive investor in Kolt.

When the entity is a “passive activity” for the owner, she may not be able to use her share of a loss for any year to the extent the loss exceeds her income from other passive activities.

Since Danni does not report income or loss from any other business activity investments, she is not allowed to deduct any amount of $300,000 loss allocated to her from Kolt, this year.

So share of loss allowed to be deducted = $0