Business & farm

2nd follow-up:

• If you are on the cash method of accounting, then you will have some additional Section 751 to the extent of any sales that have occurred and the cash has not been received.  You will net this with any payables that have not been paid.
• Example:  If you have sales of $10,000 where you have not received the cash and $2,000 of payables that the LLC has not paid, your 50% of the net figure is $4,000 (50% of $8,000).
• This $4,000 is also Section 751 property and ordinary income to you.
• So now, based on your facts you will have $49,000 in ordinary income and $56,000 in capital gain (this totals your $105,000 gain that you indicate you have).
• As stated previously, you need to manually prepare the form 6252 to determine your gain that needs to be recognized in year one (the year of sale).  This will be a combination of ordinary gain and capital gain.
• The $12,000 that you received will be used to pay the tax in the year of sale and each year thereafter.  See last bullet.
• You will also need to complete form 4797 for the ordinary income component.
• As you can see, nothing is simple when it comes to partnership tax.
• I strongly recommend you meet with a tax professional who can provide assistance in order to determine the correct gain, how to properly report it and in the end, result in the correct tax for 2020.  This cost will certainly provide you with the benefit of getting it correct in 2020 and help you in the following years.
• As you can see, the section 751 component can catch individuals off guard.  In your case, if you are in the 25% tax bracket, $49,000 x 25% = $12,250.  This tax will take all of the $12,000 received in year one; which does not include the tax on the capital gain component in year 1.
• Or is the $12,000 that you mention really $21,000 ($105,000 / 5 = $21,000).  In that case, you will be okay.