LLC dissolution after receiving gain

[edevansjax]

My 4-member LLC (LLC 2) received a gain and proceeds from another LLC (LLC 1). We distributed all of the cash from my LLC (LLC 2) and closed it in 2021. The gain from LLC 1 is on Schedule D of LLC 2. My questions are how to reduce that gain on LLC 2's K-1s by the capital account balances and how do I record a Section 754 election writeoff against the gain as well. 

Rough numbers:

Proceeds $300,000

Gain on K-1 from LLC 1:  $200,000

Capital balances of LLC 2:  $30,000

Section 754 amount for LLC 2 - all to one partner:  $100,000

It seems like the gains I report on K-1s would total $70,000 (200-30-100) but I can't figure out where in the files to record them.

Thanks!

[Mike9241]

i would suggest getting professional help.  if everything has been recorded on the tax basis and since all the assets have been distributed, the capital a/c's of the partners should be zero.  if not, something happened along the way that may require special tax treatment/allocations on termination. there is also the question of whether the 754 election is timely.  if it is valid, is the step-up required to be depreciated?  

even if everything is correct the partnership does not write off the ending capital a/c's that's for each partner to do on their 1040 once they determine their tax basis in the partnership.

[Rick19744]

Partnership tax can get complicated very quickly, regardless of the size of the entity.  I will provide some comments, but I do agree you may need to get some professional help to do this correctly.

• There is no way to reduce the gain from LLC1.  This is due to the fact that an LLC is a pass through entity and does not pay tax.  So LLC1 passes out the gain to LLC2 (which doesn't pay tax), which in turn passes out the gain the the members of LLC2.
• Your numbers do not seem to make sense or there appears to be less of a gain than what was anticipated at some point in time.
• You will most likely have two gain calculations; one for book and one for tax.
• The tax gain will also have a second component.  Here is where you need to factor in the Section 754 election amount.  This will result in a special gain allocation to the members.  This is where the section Section 754 step-up is taken into account for the specific member.  Since this member already paid for some of the built-in gain when purchased, this special allocation (separate gain computation and allocation) alleviates the member from paying twice on this gain (using after tax $$ to acquire the interest at a stepped up basis and then again upon sale).
• Essentially this means you need to do the following:
  • Determine the gain for books on LLC2
  • Determine the gain for tax on LLC2.  This will need to take into account the stepped up basis for the one member
  • Specially allocate the gain.  This may require some members to receive gain and the one member (the stepped up member) to receive a loss
  • You may have a book / tax M-1 adjustment
• The capital account balances are not the same as a member's tax basis so don't get this confused
• If there is a capital account balance remaining, so be it.  This is not really important as the member's should be maintaining their own tax basis which will determine their overall gain or loss on liquidation.
• Finally, you don't mention what the step-up or gain relate to, but there could also be some hot asset reporting / recapture that needs to be noted to the members.

[edevansjax]

Thanks to both of you for bringing some clarity to this. As a former GL accountant, I was trying too hard to get debits and credits sorted out. Once you explained the capital accounts and M-1 adjustments, all became clear.  Much appreciated.