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What filing forms are required when replacing a partner in an LLC? Are any taxes dues and how are they calculated?

I want to substitute a LLC member by another one in an LLC partnership and I am trying to have the least tax consequences in doing so. What are the best solution, the filing requirements and tax implications?
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Level 12

What filing forms are required when replacing a partner in an LLC? Are any taxes dues and how are they calculated?

Partnerships are not an easy area of the tax law.

When there is a member / partner change in a partnership there are many moving wheels that need to be considered.  Depending on the size and dollars involved, you may want to discuss with a tax professional.

This is best addressed in a face to face discussion, but here are some items that need to be considered:

  1. You can't just substitute one member for another.  The member that is leaving needs to be bought out by the new member.
  2. The law requires that the income/loss allocation be done on a per unit per day rule or an interim closing of the books method.
  3. You may need to file form 8308
  4. Does the partnership want to make a Section 754 election to allow for a step-up in basis for the new member's share of assets acquired.
  5. The tax consequences of this will be determined at the member level.  This individual will need to calculate their gain or loss on the sale.  Some of the gain could be ordinary as a result of the deemed sale of hot assets (accounts receivables for a cash method LLC, depreciation recapture).
  6. You will need to make sure that the K-1 for the "old" member is marked final
As you can see, this is not an easy area and there are many items to consider.

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

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