Dissolving a Partnership and Assets

[acefloorcovering]

My dad and I had a flooring business partnership that dissolved in December because my dad retired. I changed my entity to a sole proprietor because in California there are no single member partnerships.

For the final business tax return, how do I go about transferring the partnership assets (tools, vehicle, equipment) without having to pay back recapture on previous sec. 179 deductions that haven't fully depreciated? I am not selling, giving away, or disposing of anything. Just using them as a sole proprietor now.

[DianeW777]

You move the assets to your personal return under your sole proprietorship as though they were always yours.  The cost basis and depreciation will be 50% since you were a 50% partner. You set up the same year placed in service, the original cost basis and the prior depreciation that has been used on the partnership return.  It's a 'related party' rule.

The assets retain the same character as if you had always been depreciating them except that you will use 50% of cost and prior depreciation.  

Note: If the assets were inherited by you, then you will also enter as new assets the stepped up basis which is 50% of the FMV of the property on the date of death of your father.

Review the short tax year for partnerships if it was dissolved before December 31, 2021, if applicable. 

• IRS Publication 541

Click here for a similar situation that may provide useful information from our Tax Champs about Community Property states if applicable. 

 

[Mike9241]

if your father is walking away and you are not paying him for his interest, get professional advice.    things can get extremely complicated when a partnership is terminated especially I the partner leaving is not compensated.  as a minimum, there could be a gift tax issue and possible IRC 751 income for your dad