mjuszczak
Level 3

Did an internal buyout. What forms need to go to former partners?

Just trying to make sure my accountant is handling correctly.

 

Multi-member LLC, started 2020 with 6 owners. Two of us did an internal buyout (the company bought the interests of the 4 other partners and redistributed them to the remaining 2, including myself). So for January - April 2020, there were 6 partners, and for May - December, there were 2.

 

My accountant pro-rated the P&L correctly and we have K1s ready to go for the four former partners that show their tax liability pro-rated to their ownership for January - April. However, the buyout payment we made to them (which came from the company... though in the end I guess it really came from myself and my partner considering LLCs are pass-thru) isn't mentioned anywhere on the K1. Do we need to issue a 1099-misc for the buyout payment? Or is that something they just need to self-report?

 

To throw a wrench into the fire, the buyout payment was actually split into two. They got the first half last May, and they'll get the second half *this* May. So we'll have to report again somehow (if necessary) for 2021.

ThomasM125
Expert Alumni

Business & farm

It would be best to report the distributions in box 19 on the K-1 schedule, but that will not make it taxable when the partners enter the K-1 form on their tax return. However, it would alert them and the IRS to the fact that there was a distribution so it can be accounted for.

 

Usually, there is a form 1099-B issued to report investment sales and that would be used to report the investment sale on the recipient's personal tax return. However, you are not required to issue one since you are not a broker.

 

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mjuszczak
Level 3

Business & farm

Thanks! I mentioned to my accountant about box 19 on the K1 and he said it made sense.

 

I assume these buyout payments would still be "after tax" for myself and my business partner, right? They can't be considered an "expense" even though the company is buying out the former partners and re-distributing to us?