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passive losses and "material participation in an LLC

Last year, I got involved in an LLC that did a small solar installation. In addition to the various tax credits, it was our understanding that we would be able to deduct the losses from our income. The losses, I believe, are from depreciating our capital in the thing (the money we chipped in to build it), but I think the details of that don't matter here - what's important is that there's a negative number on Line 1 (of our K-1 Form 1065).

For 2011, we realized that we hadn't "materially participated" in the thing, so the loss would be considered "passive", and (absent any offsetting passive gains) could only be carried forward, to be taken when the LLC is dissolved in about 5 years. So we changed it so we're all listed as "general partner or LLC member manager" instead of "limited partner or other LLC member". This was supposedly going to allow us to take the loss (against ordinary income) each year. But it looks to me like all this has done is allow us to use a more inclusive set of "material participation" tests (7 of them, instead of

3) as described in:

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Even so, they all require numbers of hours of commitment that most of us can't possibly meet, but #7 "you pass if consideration of relevant facts and circumstances dictate that you materially participate in the activity on a regular, continuous and substantial basis" looks like it MIGHT be applicable.

So I'm wondering if the change on the Line G, to "general partner or LLC member manager" allows us to say we meet this test. Also, Line I1, "What type of entity is this partner ?" has been changed to "individual active", so maybe that makes a difference.

You might think that whoever prepares our K-1 would be helping with this. But they are fellow LLC members, doing it for free on a voluntary basis, are extremely busy right now as professional accountants, and simply can't be bothered advising on this right now.

Thanks !

Reply to
JGE
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By changing to a general partner you expose yourself to greater liability. You should not do it just for tax reasons.

The hours requirement don't always make sense. For example they say if you participated more than 500 hours a year. That's about 40 hours a week, a full time job. But if you started the LLC in December and have a calendar year for the LLC, then there's no way you could have worked 500 hours in that one month.

40 hours is more like it.

Also, if the LLC didn't operate much (it was just a part time thing), then I would imagine that the 500 hour limit would be reduced in proportion. So if the LLC operated only one day a week, instead of 5, then it seems logical that the number of hours is reduced to 100 per year.

Maybe you can file an extension for the LLC and your own 1040's. Still estimate your tax due and file 4868. I have no idea what the answer is.

Reply to
removeps-groups

I'm sorry, but there are about 2000 work hours in a year. So 500 hours is about 10 hours per week.

Reply to
Stuart A. Bronstein

Oops. I did 500/12 and forgot to divide by 4 :).

Reply to
removeps-groups

would imagine that the 500 hour limit would be reduced in proportion.  So if the LLC operated only one day a week, instead of 5, then it seems logical that the number of hours is reduced to 100 per year.

This is immaterial really, there's no way any of us work 100 hours or

500 hours, or whatever.

estimate your tax due and file 4868.  I have no idea what the answer is.

Oh yeah, I intend to do that - always do, for purposing of taking maximum advantage of my Roth conversions in the 15% bracket. But i like to come as close as I can by the time I file extension, plus trying to help out other members who don't do extensions.

Reply to
JGE

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