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New Member

My LLC started as a partnership but is turning to sole prop and will file form 8308 to report the sale. Should I file a ‘final’ form 1065?

I started my business as an LLC Partnership in MI and have been filing form 1065.  My partner is buying me out as of 12/31/2019 midnight.  The payment end of the sale will happen in 2020 but he has full ownership control for all of 2020.  I already submitted the 1065 for 2019 but didn’t indicate that it was a final filing.  Should I amend my 2019 1065 form to indicate that it is the final 1065 for the partnership?  If I shouldn’t file an amended return, do I need to file a ‘final’ 1065 for 1/1/2020 and he would file another return for the remaining 364 days of the year?

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Accepted Solutions
Level 10

My LLC started as a partnership but is turning to sole prop and will file form 8308 to report the sale. Should I file a ‘final’ form 1065?

This can be an extremely complicated area and depending on what type of property the partnership holds, it may be in your best interest to consult with a tax professional.

The response by @Carl is not correct based on the facts presented.

Comments as follows:

  • Based on your facts, your consequences are governed by Revenue Ruling 99-6 Situation 1.  Attached is a link to this ruling. https://www.irs.gov/pub/irs-drop/rr-99-6.pdf
  • The response may be different if you were a "retiring partner" and were being paid out over time by the partnership itself instead of the second partner.
  • Keep in mind that since the LLC is being treated as a partnership I refer to "partner".  I realize that the LLC has members, but these terms are interchangeable since the LLC is being treated as a partnership.
  • To sum it up, if your partner individually purchased your interest, then your LLC terminated at 12/31/2019.  Based on this, the 2019 Form 1065 should reflect a final return.
  • As you can see from reading the revenue ruling, there are a number of issues that need to be addressed for both the remaining "partner" who now holds a single member LLC (SMLLC) and also for you.
  • Depending on the assets held by the former multi-member LLC, some of your gain may be recharacterized as ordinary income should there be any "hot assets" in the LLC.  Your facts indicated that you will be filing form 8308.  This is only required if there are "hot assets", so your filing this form indicates this may impact you.  
  • Have you maintained your basis in the LLC in order to determine your overall gain or loss on the transaction
  • Since based on the facts, the 2019 Form 1065 is a final return, your gain or loss on this transaction needs to be reported on your 2019 Form 1040.
  • I will not go into the myriad of issues that need to be addressed by the remaining "partner" who now has a SMLLC.

So as you can see, this is not an area for the feint of heart and I once again encourage BOTH of you to consult with a tax professional who can work through the issue for both of you so you can file accurate tax returns.

*A reminder that posts in a forum such as this do not constitute tax advice.*

View solution in original post

8 Replies
Level 3

My LLC started as a partnership but is turning to sole prop and will file form 8308 to report the sale. Should I file a ‘final’ form 1065?

you'd file a final 1065 for 2019 but not for 2020....so you should amend your 2019 return.

Level 15

My LLC started as a partnership but is turning to sole prop and will file form 8308 to report the sale. Should I file a ‘final’ form 1065?

I started my business as an LLC Partnership in MI and have been filing form 1065. My partner is buying me out as of 12/31/2019 midnight.

That means if there's only one owner left, then the partnership dissolves permanently and forever. So for the 2020 partnership return, a final 1065 will be filed and both partners will be issued a final K-1.

The payment end of the sale will happen in 2020 but he has full ownership control for all of 2020.

For tax reporting purposes, until the closing on the sale actually occurs, you are still a partner. Control in the partnership is irrelevant.

I already submitted the 1065 for 2019 but didn’t indicate that it was a final filing.

That's because the partnership was not dissolved in 2019, since an actual buyout didn't occur in 2019.

Should I amend my 2019 1065 form to indicate that it is the final 1065 for the partnership?

No. Because as far as the IRS is concerned, the partnership still existed on and after 12/31/2019.

If I shouldn’t file an amended return, do I need to file a ‘final’ 1065 for 1/1/2020

I note that you used "buying my out" in present tense, and you did not say "bought me out" which would indicate the transaction had already occurred in 2019. So it's apparent to me the transaction did not occur until after Dec 31, 2019.

and he would file another return for the remaining 364 days of the year?

I would be simplest to file a final 1065 for the 2020 tax year and issue final K-1's then. If you amend the 2019 tax return, then you also have to issued amended K-1's and then both of you would have to amend your 2019 personal returns with the amended K-1 data. Seems like a lot of work for the sole purpose of checking a "final" box. Add the that the fact that amended returns can not be e-filed (the IRS says so) and with all this pandemic stuff going on your amended returns may not get processed before your next tax returns are due anyway. This *WILL* create problems for all with e-filing the 2020 return next year. So I suggest you leave 2019 well enough alone and just get it right the first time on the 2020 taxes.

Remember, if you registered your partnership/multi-member LLC with the state, you need to take action to change the status of that partnership with the state from active to inactive. Failure to do so will result in fines and penalties down the road, and it's the designated manager that will pay those fines. It doesn't come out of the non-existent partnership.

New Member

My LLC started as a partnership but is turning to sole prop and will file form 8308 to report the sale. Should I file a ‘final’ form 1065?

Thank you for the detailed answer.  It all make sense. 

Level 3

My LLC started as a partnership but is turning to sole prop and will file form 8308 to report the sale. Should I file a ‘final’ form 1065?

if you and your partner agreed to a buyout as of 12.31.2019 and that your partner would have full control after that date then the partnership terminated on 12.31.2019.....it doesn't matter when your partner pays you for your interest in the partnership...the partnership ceased to exist after the end of last year.

Level 3

My LLC started as a partnership but is turning to sole prop and will file form 8308 to report the sale. Should I file a ‘final’ form 1065?

LOL...."detailed" doesn't mean correct.

Level 10

My LLC started as a partnership but is turning to sole prop and will file form 8308 to report the sale. Should I file a ‘final’ form 1065?

This can be an extremely complicated area and depending on what type of property the partnership holds, it may be in your best interest to consult with a tax professional.

The response by @Carl is not correct based on the facts presented.

Comments as follows:

  • Based on your facts, your consequences are governed by Revenue Ruling 99-6 Situation 1.  Attached is a link to this ruling. https://www.irs.gov/pub/irs-drop/rr-99-6.pdf
  • The response may be different if you were a "retiring partner" and were being paid out over time by the partnership itself instead of the second partner.
  • Keep in mind that since the LLC is being treated as a partnership I refer to "partner".  I realize that the LLC has members, but these terms are interchangeable since the LLC is being treated as a partnership.
  • To sum it up, if your partner individually purchased your interest, then your LLC terminated at 12/31/2019.  Based on this, the 2019 Form 1065 should reflect a final return.
  • As you can see from reading the revenue ruling, there are a number of issues that need to be addressed for both the remaining "partner" who now holds a single member LLC (SMLLC) and also for you.
  • Depending on the assets held by the former multi-member LLC, some of your gain may be recharacterized as ordinary income should there be any "hot assets" in the LLC.  Your facts indicated that you will be filing form 8308.  This is only required if there are "hot assets", so your filing this form indicates this may impact you.  
  • Have you maintained your basis in the LLC in order to determine your overall gain or loss on the transaction
  • Since based on the facts, the 2019 Form 1065 is a final return, your gain or loss on this transaction needs to be reported on your 2019 Form 1040.
  • I will not go into the myriad of issues that need to be addressed by the remaining "partner" who now has a SMLLC.

So as you can see, this is not an area for the feint of heart and I once again encourage BOTH of you to consult with a tax professional who can work through the issue for both of you so you can file accurate tax returns.

*A reminder that posts in a forum such as this do not constitute tax advice.*

View solution in original post

Level 15

My LLC started as a partnership but is turning to sole prop and will file form 8308 to report the sale. Should I file a ‘final’ form 1065?

RIck,

 I hadn't even touched on the transfer to the single-member LLC. That's it's own headache. The setup here also gives me the impression that there's not a whole lot "in writing". But impressions can often be wrong.

 

Level 3

My LLC started as a partnership but is turning to sole prop and will file form 8308 to report the sale. Should I file a ‘final’ form 1065?

To wrap this up what occurs with the other partner in the transfer to the single member LLC doesn't seem to matter because that is not staugust1's problem. Saying that "there's not a whole lot "in writing"" is kind of goofy because not everything has to be in writing to be enforceable and that includes partnership agreements. In one of the other messages, saying that the IRS says you can't Efile amended returns is wrong because the IRS does allow amended returns to be Efiled except for an amended 1040 or 706....you can Efile an amended 1065 that's for sure....maybe not with turbotax though.

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