Started a LLC business with another partner in 2013 as a sleeping partner. Invested $45k. Sold partnership interest to the other partner in 2016 for $80k. No distributions or any contribution during these years. 3 years K-1 section shows like this...
$65k 2013 Capital contributed
-$5k - 2013 loss
- $10k - 2014 loss
+11k - 2015 Gain
+15k - 2016 Gain
-76k - 2016 Distribution
0.00 - 2016 Ending Capital
Base on the above calculation, is my partnership basis at $76k and ordinary gain at $11k? I assume the zero ending capital is not my basis? Please advise.
I don't know how the CPA came up with $65k contributed capital and Distribution at $66k when I sold it for $80k. Does it matter with the actual differences? I can't possibly use my numbers now since those were reported back 3 years ago. I never pay attention to all these numbers until I try to figure out my partnership basis.
Thanks for the response. I will provide some commentary and direction:
If you're just entering a K_1 on your personal tax return, you don't calculate squat. You enter the K-1 exactly as printed. The CPA should have done all the figuring for you when they completed the 1065 partnership return and issued you the K-1.
First thing to do is to contact that CPA and figure out why a $45K initial contribution magically changed into a $65K contribution. What are we missing here? That's a huge difference that needs to be understood.
The Schedule K-1 doesn't report your gain or loss on sale, it simply reports, among other things, the changes in your partnership capital account and the $76K vs. the $80K is simply zeroing out your capital account on the partnership's books.
Additional questions:
1) Your K-1 section L. What box is checked?
2) When you invested the $45,000, was this all cash or did you contributed property where FMV was not equal to your adjusted basis?
3) Since you indicate you were a silent member, I assume you still have approximately $4,000 in suspended passive activity losses going into 2016?
4) Anything reported on line 19 of your K-1?
Second set of questions after reading your question again:
5) Did the LLC have any depreciation?
6) What was the method of accounting of the LLC?
These responses to these two additional questions could impact the character of your gain; will not change the overall gain (if you have a gain based on the responses to all the previous questions), just the character - capital / ordinary.
To answer Rick19744...
1) Section L, tax basis checked
2) $45k all cash
3) I don't understand what is suspended passive losses. K-1 didn't show any $4000 at all.
4) Yes. Distribution of $76k is listed in box 19 with an A.
5) Yes. The 1065 line 16 shows depreciation of $7624
6) Accounting method Cash
At this point, I am not going to try to trace back 3 yrs ago. I blamed my own negligence for not realizing the error. I just want to complete it.
2016 section L, ending capital showed zero because of the $76k distribution. I assumed the remaining partner paid me therefore list it as distribution from the business.
Thanks for the response. I will provide some commentary and direction:
Have a related question, trying to find where best to post....
Topic: LLC Capital Account – Impact on FMV of interest, Tax Basis in Year of Sale of Interest
Situation:
Example:
Questions:
before the sale you should have contacted a tax advisor. things may be complicated for both the buyer and seller. the seller would be allocated income through the date of sale and that would include any income/loss from that pass-thru entity. if the starting tax basis was $50K it would go up by the allocated income and down by any distributions before the date of sale. but wait there could be .
IRC Section 751 Treatment of Hot Assets (the partnership would need to report this on the sellers k-1)
The linchpin of taxing transfers of partnership interests is IRC Section 751. Under IRC Section 741, when a partner sells his interest, he is entitled to capital gain treatment, except as provided in IRC Section 751. Under IRC Section 731, when a partner receives a partnership distribution in liquidation of his interest, he is entitled to capital gain treatment, except as provided in IRC Section 751. Regarding sales of partnership interests to third parties, IRC Section 751 is pretty straightforward. But regarding sales of partnership interests back to the partnership, IRC Section 751 can get a little intricate.
Sale of Partnership Interest
When a partner sells his partnership interest to anyone other than the partnership, the partner is entitled to capital gain or loss treatment, except with respect to so-called "hot assets." "Hot assets" are "unrealized receivables" and "inventory items" as defined under IRC Section 751. These are basically ordinary income producing assets, such as accounts receivable not already recognized as income, LIFO reserves, appreciated inventory, and depreciation recapture. Thus, unlike the seller of corporate stock, a selling partner's tax
treatment depends upon the underlying partnership assets.
the buyer also faces tax issues as to where to properly allocated the purchase price above the tax basis of what he's buying.
@Anonymous Thank you so much! Makes sense on the tax treatment, will need to continue to think through the details.
Quick follow up: If two equal partners in an LLC each have $50,000 in their capital account and one partner sells to the other at an agreed upon valuation of $500,000 for the 50%. Does the selling partner receive $500,000 for the FMV of their interest AND the $50,000 in their capital account?
If the $500k valuation is based on the go-forward earnings of the business... the valuation is going to be $500k whether the partner takes out his $50k or leaves it in the business.
We are trying to determine if the selling partner should walk away with $500k or $550k.