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Level 1

Schedule K-1 disposition partnership interest in LLC converted to C-Corp

I was a partner in an LLC that converted to a C-Corp in 2016 and have a Final K-1.  I did not receive any cash in the conversion and assumed equity in the new C-Corp.  On schedule K-1 in TurboTax, I have marked Complete Disposition and Sold Partnership Interest.  My basis was a profits interest valued at $0 under IRS 83(b) but there were cumulative losses in the LLC.  So I put my ending capital account negative amount as my partnership basis for the "Sale".  Is this the correct way to report this?
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Accepted Solutions
Level 11

Schedule K-1 disposition partnership interest in LLC converted to C-Corp

There are a number of issues here and I will provide some general comments:

  1. I don't agree that your basis is zero due to Section 83(b).  Your basis may have started at zero when given your profits interest, but your basis is adjusted annually for the applicable lines on your K-1.
  2. Regardless of what your basis is, this basis is now the basis in your C corporation stock and unlike your LLC basis will not change; unless of course you contribute additional capital.
  3. The LLC does not have cumulative losses.  Losses and income of an LLC are passed out to the members.  The LLC may have negative partner capital as a result of losses.
  4. This negative partner capital is a book issue.  What you need to understand is what is your tax basis.  As a member in an LLC you need to be tracking your basis as noted in item 1 above.
  5. Do you have suspended losses?  Are these the result of no at-risk to take the losses?  If the LLC return was done correctly, you should not have been allocated losses if you did not have any basis.  This would be contrary to the regulations under Section 704(b).
  6. So while you didn't technically "sell" the LLC interest, not sure there is a better option within TT to address this from a TT perspective.  I would think that your sales price and basis are zero based on your facts which would result in not tax impact.  This makes sense.
3 Replies
Level 11

Schedule K-1 disposition partnership interest in LLC converted to C-Corp

There are a number of issues here and I will provide some general comments:

  1. I don't agree that your basis is zero due to Section 83(b).  Your basis may have started at zero when given your profits interest, but your basis is adjusted annually for the applicable lines on your K-1.
  2. Regardless of what your basis is, this basis is now the basis in your C corporation stock and unlike your LLC basis will not change; unless of course you contribute additional capital.
  3. The LLC does not have cumulative losses.  Losses and income of an LLC are passed out to the members.  The LLC may have negative partner capital as a result of losses.
  4. This negative partner capital is a book issue.  What you need to understand is what is your tax basis.  As a member in an LLC you need to be tracking your basis as noted in item 1 above.
  5. Do you have suspended losses?  Are these the result of no at-risk to take the losses?  If the LLC return was done correctly, you should not have been allocated losses if you did not have any basis.  This would be contrary to the regulations under Section 704(b).
  6. So while you didn't technically "sell" the LLC interest, not sure there is a better option within TT to address this from a TT perspective.  I would think that your sales price and basis are zero based on your facts which would result in not tax impact.  This makes sense.
Level 1

Schedule K-1 disposition partnership interest in LLC converted to C-Corp

Thank you so much - your answer together with what I have been reading on the IRS, etc. publications, helped me tremendously.
Level 11

Schedule K-1 disposition partnership interest in LLC converted to C-Corp

You are welcome.  Glad to have provided some guidance.