How do I record the conversion of a loan to LLC equity in the 1065 forms?

[tim3]

I have a 2 member LLC (50/50) that I made  2 loans to (with interest)  - one in 2014 and another in 2015. I converted both loans to member equity in 2015 when the other member added an amount of owner's equity to equal the principle and interest. How do I record the conversion in the 1065 forms?  Thanks!

Tim

[Rick19744 · Accepted solution]

This is all balance sheet.  It appears that the interest was never paid and just accumulated; in a case like this the IRS may want to take a position that this was equity from the beginning so converting makes sense.

Additionally, it appears that the other member contributing more $$ as well, the economics stay the same; which is good.

On your balance sheet you would just make the following entry; Dr. Member Loan Cr. Member Equity.  Essentially you are just reclassing the loan to equity.