Claiming My Investments

Today TaxMama® hears from Jeff in the TaxQuips Forum who is becoming an investor.  “Last year I invested in $20k a business & $5k this year. In return I have a 25% share of the LLC. I did not claim any of it on this year’s tax return. Can I? And how do I claim the investments on next year’s 2012 tax return? Also, this year I started my own, 100% owned LLC.”

Dear Jeff,

Congratulations on making investments.

If you’ve done your homework, this can be a good way to build up assets – and a long-term stream of earnings. But did you really make investments without having a clue about the tax consequences, beforehand? When you invest, it would be wise to look at the tax issues as well as the company’s potential viability before investing.

Unfortunately, I cannot answer your questions about how to ‘claim’ your investments for tax purposes. I haven’t a clue how these LLCs are being reported for tax purposes. Read what I’m talking about at BizFilings.com. Without that information, no meaningful answer is possible. But let me give you an overview of what tends to happen.

First of all, when you make an investment, it’s an asset. You don’t generally write it off. It just sits in your portfolio, like stocks.

Second, if no one makes any decisions about the LLCs, they will act like partnerships and you will get a K-1. Most of the line items on the K-1 will raise or lower your basis (tax cost) of the investment. Or in the case of your own LLC, it will simply be included in your own tax return (Schedule C). In both of these cases, you will end up reporting your share of the profit or loss, and a few other specific attributes on your own tax return.

If they make a decision to file as a corporation, you don’t report anything – except any dividends or wages they pay you. Neither of these kinds of payments will affect your basis.

If they decide to file as an S corporation, you will get a K-1, just like the partnership.
And most of the line items on the K-1 will raise or lower your basis (tax cost) of the investment.

These are just broad generalities about LLCs, which can be the most versatile of investments. But the versatility is only valueable if someone takes advantage of the choices and makes the correct choice for both the business and the investors. When no choices are made, things tend to get messed up within a year or so. I am in the process of helping a tax professional straighten-out something like that right now.

Please get better informed – and perhaps we can give you more detailed answers. And I do hope all your businesses prosper.

And remember, you can find answers to all kinds of questions about investments and other tax issues, free. Where? Where else? At www.TaxMama.com.

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