To the Moderator: Our tax entity is a General Partnership. Since I don't see this specific category here, and since LLP seems to be closest to GP for tax purposes, I am posting my question here. Please let me know if I should move or re-post it elsewhere.


To the Forum:

This tax year, we have shifted focus of our GP to a new software venture development, significantly dropping our consulting work. Consequently, our consulting income has dropped, as expected of course. We self-financed our startup work from our savings.


The funds were used for business related expenses (software, services, office, health insurance), as well for personal living expenses, as if we worked for a company paying us compensation for our software development work. All inflows and outflows are well documented in bank records and expense receipts.

We deposited savings funds into personal checking accounts, from which part of the money was used for regular personal living expenses, and part for business expenses, posted as bills into QB. All this resulted in a business loss, which is passed to the partners via K-1.


Questions.

1. Given that there is practically no income on the individual side, what is the optimal way to avoid losing all these deductions, plus deductions on the personal side, such as health insurance, possibly preserving them somehow for future years for a deduction against potential future income?


2. Should the inflow of the personal savings financing of the venture be recorded somehow as if we worked for a third party, a company or another financing entity, which paid us compensation, some of which was used for business expenses and some for personal?


When I thought about question 2 previously, it did not make sense to me, even if there was a legally correct way of doing it. I thought it would generate self-employment taxes which would defeat the purpose. However, I just don't have the knowledge to fully understand all the implications and possibilities. Hence my questions to tax gurus.

1. Given that there is practically no income on the individual side, what is the optimal way to avoid losing all these deductions, plus deductions on the personal side, such as health insurance, possibly preserving them somehow for future years for a deduction against potential future income?=======>>Personal living expenses not related to the business activities ar not deductible on either the PS?s or partner?s income tax return; If you incur a loss in your GP, you may deduct the loss from your other sources of income reported on Form 1040. your share of the business?s losses are passed through the business to your individual return and deducted from your other personal income in the same way as a sole proprietorIf your losses exceed your income from all sources for the year, you have a ?net operating loss. While it?s not pleasant to lose money, an NOL can provide important tax benefits: It may be used to reduce your tax liability for both past and future years.you may need to file 1040X for refund



2. Should the inflow of the personal savings financing of the venture be recorded somehow as if we worked for a third party, a company or another financing entity, which paid us compensation, some of which was used for business expenses and some for personal?=======>>>>>>>>>>>>>>>>>>>>> your GP?s operating agreeement outlines the amount of money, if any, each partner puts up for the formation of the new business, the repayment terms on these funds and the policies for any future loans to the business, In your operating agreement or contract, partners will typically outline one of three ways that a partner loan may be treated. First, it may be considered as a loan that will be paid back whenever the funds become available. In the event the GP dissolves, the loan will be paid back only if there is money to cover it. Second, the loan may be set to be paid back within a certain amount of time after the money is loaned. This type of loan is often made to a stable business that simply needs more cash on hand. Third, the loan may be viewed as an investment in the GP to be paid back with a specified amount of interest over a period of time that the partners deem acceptable. Your operating agreement will specify different terms for money that you, as partners, give during the initial formation stages to cover start-up costs and loans made later on in business. Separate terms may also apply if a partner guarantees a certain amount during formation but ends up loaning more due to business needs. Often partnership agreements will specify that the initial "loan" is not to be directly paid back to the partner; that is, his payment will come in the form of salary , I mean guaranteed payments NOT W2 wages he takes. Money given beyond what was initially promised will have specific repayment terms outlined. Some partnerships opt for no partners making a salary until each loan is repaid, or each partner taking a reduced salary until the loans are repaid.ALSO, It is important for the operating agreement to spell out the terms of interest to be paid on partner loans. The agreement should outline whether the partner will make a fixed rate / a variable interest rate over the life of the loan. It should specify how often your interest is compounded and if the interest will be paid back in small payments over the life of the loan or all at one time with the repayment of the principal loan amount. An operating agreement that outlines all of these terms will go a long way in assuring that each partner is treated fairly and preventing disagreements or even legal action.


When I thought about question 2 previously, it did not make sense to me, even if there was a legally correct way of doing it. I thought it would generate self-employment taxes which would defeat the purpose. However, I just don't have the knowledge to fully understand all the implications and possibilities. Hence my questions to tax gurus===>>>>>>>>>>>>>>>>>As mentioned; the partnership will pay you, the same interest that the loan has, thereby deducting the interest expense ;1099-INT required at end of year. The partner will then report the interest income on your return, but you can deduct investment interest expense for the same amount. This loan should be documented as well. Th einterrst income may be subject to self employment tax.

What specific accounting and/or tax reporting mechanism should we use to capture these tax benefits for future years? Any implementation specifics for QB?==>Basically I guess it does not matter what accounting method/period your PS chooses however,As said your PS can not claim it on 1065 . since your business is a partnership, your share of the business?s losses will pass through the entity to your personal tax return ; income or loss from YOUR partnership is YOUR , the partner's, distributive share of THE partnership items for the partnership's tax year that ends with or within the partner's tax year. These items are reported to the partner on Schedule K-1 as a partner of the GP, you do not file Sch C of 1040, so to claim your share of NOL from the GP, you need to report it on your SCh k1 of 1065 part 3 box 1 ,
Sch E, line 28, column (h) , and 1040 line 17 as negative amount;to claim your portion of the biz losses from your partnership, but You can?t deduct losses in excess of your adsjusted basis in your partnership. Yiour adjusted basis is figured at the end of the partnership's tax year in which the loss occurred, before taking the loss into account.Your basis starts with your initial investment in your ownership interest is increased by capital contributions AND IS reduced by distributions.I guess no specific accounting method in claiming net biz losses as partners; Accounting method choices that depend on the individual tax circumstances of the individual partners are made at the partner level. So I mean you can choose either accrual or cash whichever is good for you to claim the biz losses on your 1040. You have the option of carrying back an NOL two years or waiving the carryback period and simply carrying the NOL forward up to 20 years


Note; most accounting method choices are made by the partnership at the entity ,partnership, level, and not at the individual partner level.

Re:2.
The loan solution is well understood now, thank you. Just for comparison, is there another approach, let's say, an additional paid-in capital somehow recorded using an equity account? It's just a consideration, we are not particularly biased one way or another.======>> Additional paid-in capital is any payment received from investors for stock that exceeds the par value of the stock. it is a value included in the contributed surplus account in the shareholders' equity section of a company's balance sheet.The concept applies to payments received for either common stock or preferred stock. Par value is typically set extremely low, so most of the amount paid by investors for stock will be recorded as additional paid-in capital. Partnerships don?t issue stock and don?t pay dividends. Both of these activities are reserved for corporations. However, a partnership can make income that it distributes to its partners. Distributions resemble dividends in several ways: They are normally cash payments and may be issued periodically throughout the year. However, they don?t qualify for special tax rates and are treated as ordinary income.

your partnership capital account is an equity account in the accounting records of the partnership. It contains the following types of transactions:Initial and subsequent contributions by partners to the partnership, in the form of either cash or then fair market value of other types of assets; Profits and losses earned by the business, and allocated to the partners based on the provisions of the partnership agreement; Distributions to the partners.your partnership can maintain a single partnership capital account for all partners, with a supporting schedule that breaks down the capital account for each partner. However, it is easier over the long term to instead maintain separate capital accounts within the accounting system for each partner; by doing so, it is easier to determine the amount to be distributed to each partner in the event of a liquidation of the business or the departure of a partner, which in turn reduces the amount of discussion over payments and liabilities amongst the partners.

Thank you, you have answered my questions. Obviously, I am not at your level of expertise, need some time to absorb all the details, but I believe I understood each of your points in principle, sufficiently enough to proceed. Hopefully, there would not be much need for a follow-up.
Greatly appreciate your help.

hope it helps