Help with Schedule K-1 (1065): Calculating Adjusted Basis for small LLC partnership

You've got a few things to unpack here, so let's tackle them one by one. First, yes, working 40 hours per week at the LLC makes you an active participant in the partnership. Your level of involvement easily meets the material participation tests. For the at-risk rules, having $0 in Item K liabilities doesn't automatically make you "not at-risk." Being at-risk relates to what you've personally invested or what you're personally liable for. Since you received your partnership interest as a bonus, your initial at-risk amount would be the value that was included in your income when you received it (if any). Now for the adjusted basis: Yes, you do need to calculate it. The partnership losses can only be deducted to the extent of your basis. When your basis reaches zero, you can't deduct any more losses until your basis increases through contributions, income, etc. Starting with your negative capital account doesn't work for adjusted basis. Your basis can never go below zero (that's why the worksheet stops at zero). Since your capital account was already negative last year, and you didn't mention making any contributions this year, your starting basis for this year would likely be zero. The decrease to your capital account (-$3,800) represents your share of the losses, but you can only deduct those losses to the extent of your basis. If your basis was zero at the beginning of the year and you made no contributions, you wouldn't be able to deduct any of those losses this year - they would be suspended until you build up basis in the future.

You've got a few things to unpack here, so let's tackle them one by one. First, yes, working 40 hours per week at the LLC makes you an active participant in the partnership. Your level of involvement easily meets the material participation tests. For the at-risk rules, having $0 in Item K liabilities doesn't automatically make you "not at-risk." Being at-risk relates to what you've personally invested or what you're personally liable for. Since you received your partnership interest as a bonus, your initial at-risk amount would be the value that was included in your income when you received it (if any). Now for the adjusted basis: Yes, you do need to calculate it. The partnership losses can only be deducted to the extent of your basis. When your basis reaches zero, you can't deduct any more losses until your basis increases through contributions, income, etc. Starting with your negative capital account doesn't work for adjusted basis. Your basis can never go below zero (that's why the worksheet stops at zero). Since your capital account was already negative last year, and you didn't mention making any contributions this year, your starting basis for this year would likely be zero. The decrease to your capital account (-$3,800) represents your share of the losses, but you can only deduct those losses to the extent of your basis. If your

After struggling with similar Schedule K-1 (1065) basis calculations for my small business investment, I found an amazing tool that made everything clear. I was completely lost trying to figure out my adjusted basis and at-risk amounts until I discovered https://taxr.ai What made the difference for me was uploading my past K-1s and my current one. The system analyzed them together and showed me exactly how my basis had changed over time, plus it gave me the correct amount to enter for my starting basis this year. It specifically handled my negative capital account situation (similar to yours) and explained why my tax software needed a zero entry for starting basis while tracking my suspended losses. The best part was that it showed me a step-by-step calculation worksheet following the exact IRS rules for adjusted basis with partnership losses. Saved me hours of confusion and probably an expensive call to my accountant!

Just wanted to follow up - I tried https://taxr.ai for my Schedule K-1 (1065) basis calculations and I'm honestly blown away. I uploaded my current K-1 and last year's K-1, and it immediately identified that I had suspended losses from prior years that my tax guy never mentioned! It showed me exactly how to calculate my adjusted basis starting from my negative capital account (just like your situation), and explained why certain losses were limited. It even created a personalized worksheet showing exactly what to enter in my tax software. The at-risk calculation was separated out completely from the basis calculation, which cleared up so much confusion. I ended up saving over $900 on my taxes by correctly applying some previously suspended losses that had become deductible. My tax guy missed this entirely last year!

If you're struggling to get help with your Schedule K-1 (1065) adjusted basis questions, I feel your pain. I spent THREE DAYS trying to get through to the IRS Partnership hotline last month with similar questions. Kept getting disconnected after waiting for hours. Finally found this service called https://claimyr.com that got me connected to an actual IRS agent within 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent walked me through the entire basis calculation process for my situation (also received partnership interest as compensation) and confirmed that when starting with a negative capital account, your beginning basis for the tax software should indeed be zero. They also explained how to track the suspended losses so I can use them in future years when my basis increases. Totally changed my understanding of the Schedule K-1 (1065) basis rules and saved me from making a pretty significant error on my return.

I need to eat crow here. After my skeptical comment, I actually tried Claimyr for an issue with my Schedule K-1 (1065) adjusted basis calculation that was similar to the original poster's situation. Not only did it work exactly as promised, but I got connected to an IRS partnership specialist who immediately understood my negative capital account situation. The agent confirmed that with a starting negative capital account and no additional contributions, my beginning adjusted basis would indeed be zero for tax software purposes, and the partnership losses would be suspended until I had future basis. The agent even emailed me specific IRS guidance on tracking suspended losses from partnership interests received as compensation - something I couldn't find anywhere online. Completely solved my Schedule K-1 basis calculation issues in a 15-minute call instead of weeks of research and stress.

For your Schedule K-1 (1065) adjusted basis, I think you're getting confused between capital account and outside basis. They're different things! Your capital account can go negative (as yours has) but your basis can never go below zero. Since you got your interest as a bonus, your initial basis was probably the value included in your income. If that was zero, then your starting basis was zero. Since your basis starts at zero, you can't deduct any of the partnership losses now. They get suspended and carry forward until you get more basis (either by contributing money/property to the LLC or by the LLC generating income that's allocated to you). For the tax software, you're correct to enter zero as your starting basis if it was already zero last year. Make sure you track your suspended losses somewhere though - those are important for future years!

Dealing with Schedule K-1 (1065) adjusted basis calculations can be a nightmare! I'm a partner in 3 different LLCs and finally figured out how to handle negative capital accounts. The key thing to understand: your adjusted basis and your capital account are calculated differently. Your capital account can go negative, but your tax basis cannot. When you receive a partnership interest as compensation (like you did), your initial basis equals the amount included in your income. If you didn't include any amount in income, your initial basis was zero. With a starting basis of zero and no additional contributions, you can't claim any of the $3,800 loss this year. But those losses aren't gone! They're suspended and can be used in future years when you have basis. For tax software, enter zero as your beginning basis, then show your share of loss, but the software should limit your loss deduction to zero.