Llc has 3 members, the llc purchased the 1members interest for more than his capital account bal. what forms would be required for tax purposes. Beyond the 1065, k1s

[roncollins10]

beyond 1065, k1's and 8308.

[Rick19744]

LLC's are complicated.  I have a couple of questions:
1) What is the LLC method of accounting?
2) Do you have inventory?
3) Do you have depreciable assets?

[roncollins10]

accrual, no inventory, two buildings and furniture

[Rick19744]

Ok.  So as noted in my initial comment, partnership tax is complicated and you may want to consult with a tax professional on this matter.  Having said that, I will provide some direction and comments:

1. What is involved in this situation is an LLC member redemption.
2. When selling or redeeming a member interest, the tax law looks through the actual interest to what underlying assets of the partnership are deemed to be sold.
3. One of the complicating items involved is that based on your facts there are "hot assets" (Section 751 property).  In your case, the hot asset is depreciable property.  This type of property is included in the definition of unrealized receivables.  
4. The LLC will need to compute the redeemed member's share of hot assets (depreciation recapture under Section 1245 and 1250) and provide this information to the redeemed member.  This is very important as this will impact the character of the gain by the member.
5. Since there are hot assets, the LLC will also need to complete form 8308 and include this with their tax return. In addition, you will need to attach a copy of this form with the final K-1 of the redeemed member.
6. Since you indicate that the amount paid is in excess of the capital account, the LLC will need to record an internal book gain.  Keep in mind that this is a book gain and not a tax gain; so this amount will be an M-1 on the form 1065 for the LLC.
7. Since you indicate that the amount paid is in excess of the capital account, the LLC will need to decide if it wants to make a Section 754 election to step-up the basis of the assets.  If this election is made, then the LC will also need to include a statement to provide the information required under Section 734.

As you can see there are a number of issues.  Hopefully the above provided some direction.

Attached is a link to form 8308

https://www.irs.gov/pub/irs-pdf/f8308.pdf

[accounting6]

Point of clarification for a 3-member LLC here (33/33/33). If there are no hot assets, no liabilities, just cash in the bank...and two remaining members buyout the third member's interest, what tax doc do we report that "sale" on for the seller? A 1099? My understanding is this would NOT be reported on the sellers final K-1. Working hard to find a FT CPA for us, but looking for some clarity to aid me in communications with the partners. Thanks, and advice appreciated.

[Rick19744]

Hot assets can take many forms; "A/R" of cash basis taxpayer, inventory and depreciation recapture.  So make sure you understand if any of those items apply.
My comments are as follows:
1) If no hot assets, then no form 8308 would be required to be filed by the partnership
2) If the remaining two member's acquired the interest of the one member directly, no additional reporting required.
3) If the member was redeemed by the LLC, then report the liquidating distribution on the exiting member K-1.
4) Regardless of how the member exited, you could have the potential for a step-up in basis under Section 754.  This election needs to be made on a timely filed form 1065.  In addition, depending on how the exiting member interest was acquired, additional information under Section 734 or 743 needs to be included with the appropriate tax return.  A section 754 would be beneficial if the exiting member was paid more than book value for their interest.
5) The exiting member will then need to determine their gain or loss upon disposition by comparing the liquidating distribution or cash from the other member's to their basis in the LLC.  Hopefully the exiting member was maintaining a basis schedule.

[accounting6]

This was SO helpful, thank you thank you.

It is a redemption, not a sale. Two clarifying questions if you're willing. As far as reporting the liquidation distribution on the exiting member's K-1, would that be in the same distribution box as his CAB distributions (Box 19), just adding on the additional amount/overage? Or a different box on the K-1?

And the second part, there were a handful of remaining payments in Q1 2019 of that overage as well. Where should those payments be recorded for taxes? Would this fact mean that the K-1 for 2018 isn't the final, and the a K-1 for 2019 would be? Or can we use a different form to report that balance paid in Q1 2019 on 2019 taxes?

This should do it for me! While locking in a CPA is going to be so important for us (and we're meeting with a few in the upcoming weeks), I do greatly appreciate your assistance with comprehending this stuff!

[Rick19744]

Welcome.
Responses to your follow-up questions:
1) Redemption reported in box 19 code A
2) If, as you stated, there were some additional distributions in 2019 to the exiting member, then the 2018 K-1 is not final.
3) There could be some "internal" accounting adjustments / transfers that will need to be recorded in order to get the  capital accounts to conform to the redemption.