Change in LLC ownership allocation of income/expense

[LisaATP]

First year using TurboTax for LLC return.  We have an investment LLC with 5 members at the beginning of 2021.  In June we opened the fund for additional investors and got 20 new ones.  I have set up all of the new investors with their ownership percentages and the dates of change.  Does TurboTax allow you to use an interim closing method to allocate the LLC income/expense? Basically having 2 closings  and allocating its items among the partners in accordance with their respective partnership interests during each segment of the taxable year.  The only option I can find is the weighted average.  

[Anonymous_]

I will page @Rick19744 for this.

I am not certain whether special allocations would be appropriate with this scenario (which is where the allocations do not correspond to the actual percentage interests).

[LisaATP]

I updated the wording of my question to be similar to what the tax regulations say.  

[Rick19744]

Well.....good news and bad news and some comments:

• Under Section 706, the interim closing of the books is the default method of handling this.
• The LLC (taxed as a partnership) can use the proration method only if agreed to by the partners.  In this case you would want to make sure you have a document signed by all partners.  Absent this, the interim closing of the books is mandatory.
• TT can handle this, however depending on what items on the K-1 you are dealing with, it may be a little complicated.
  • You can use Excel and develop a model of what the income allocation should be based on each period and member ownership.  You would then use this model to determine a member allocation percentage and use that in TT for the member's profit and loss percentages (not their capital).
  • This would work for most line items, but where it may not work is in the area of capital gains, losses depending on when those occurred.  This may require a separate excel computation.
  • If your LLC only has capital gains and losses, then this may be feasible.  In most cases partnerships are having ordinary business income, maybe some rental, possible some capital transactions, etc.  This would require separate allocations as noted next. 
  • Just not sure what line items your LLC will be reflecting on the K-1.
• If bullet 3 isn't feasible, you would have to develop the allocations in excel as noted above (for each specific K-1 line items) and override each member's allocation.  Doing this would preclude you from efiling your form 1065.
• If bullet 3 would work, then you would have to remember to change the profit and loss percentages in TT next year to actual.
• If bullet 3 doesn't work, and you need to override each K-1 line item, then I recommend you put "var" for each member's profit and loss percentages.  For capital interest you can use actual.

[Mike9241]

How Income Is Shared Among
Partners
Allocate shares of income, gain, loss,
deduction, or credit among the partners
according to the partnership agreement for
sharing income or loss generally. Partners
may agree to allocate specific items in a ratio
different from the ratio for sharing income or
loss. For instance, if the net income
exclusive of specially allocated items is
divided evenly among three partners but
some special items are allocated 50% to
one, 30% to another, and 20% to the third
partner, report the specially allocated items
on the appropriate line of the applicable
partner's Schedule K-1 and the total on the
appropriate line of Schedule K, instead of on
the numbered lines on page 1 of Form 1065,
Form 1125-A, or Schedule D.
If a partner's interest changed during the
year (such as the entrance of a new partner,
the exit of a partner, an increase to a
partner's interest through an additional
capital contribution, or a decrease in a
partner's interest through a distribution), see
section 706(d) and Regulations section
1.706-4 before determining each partner's
distributive share of any item of income,
gain, loss, and deduction, and other items.
Partnership items are allocated to a partner
only for the part of the year in which that
person is a member of the partnership.
Generally, for each change in a partner’s
interest, the partnership will either allocate its
items using a proration method or a
closing-of-the-books method. Special rules
apply to certain partnerships, certain
variations, and certain items. See
Regulations section 1.706-4 for additional
rules and procedures for making elections. In
addition, special rules in section 706(d)(2)
apply to certain items of partnerships that
report their income on the cash basis, and
special rules in section 706(d)(3) apply to
tiered partnerships.
Special rules on the allocation of income,
gain, loss, and deductions generally apply if
a partner contributes property to the
partnership and the FMV of that property at
the time of contribution differs from the
contributing partner's adjusted tax basis.

Under these rules, the partnership must use
a reasonable method of making allocations
of income, gain, loss, and deductions from
the property so that the contributing partner
receives the tax burdens and benefits of an

built-in gain or loss (that is, precontribution
appreciation or diminution of value of the
contributed property). See Regulations
section 1.704-3 for details on how to make
these allocations, including a description of
specific allocation methods that are generally
reasonable.
See Dispositions of Contributed Property,
earlier, for special rules on the allocation of
income, gain, loss, and deductions on the
disposition of property contributed to the
partnership by a partner.
If the partnership agreement doesn't
provide for the partner's share of income,
gain, loss, deduction, or credit, or if the
allocation under the agreement doesn't have
substantial economic effect, the partner's
share is determined according to the
partner's interest in the partnership. See
Regulations section 1.704-1 for more
information.

[LisaATP]

Rick,

Thank you for your reply.  I am trying your suggestion.  Hopefully I will get it to work correctly.  Can I reach out with additional TurboTax questions if I have them?

[LisaATP]

Rick,

I took your advise and prepared a spreadsheet to allocate ordinary business income and capital gains/losses.  I input these amounts/percentages as special allocations and they flowing correctly to each of the K-1's.  I would like to show VAR for each members profit and loss percentage as you recommended.  How do I do this?  Everywhere I have tried it wants a number.  I have entered the correct capital %.  

Thanks again for all of your help!