The K-1 instructions that I provided a link to previously do provide guidance on what to include with the return and for the respective K-1.
However, dealing with Section 704(c) is not an easy area.
As stated previously, once you determine the amount of Section 704(c), this amount needs to be specifically allocated to the noncontributing members; yes, noncontributing members. So in your case, each of you is the noncontributing member for the Section 704(c) of the other member.
The allocation needs to be handled through special allocations described in the regulations, which I won't get into, but they are known as traditional, traditional with curative or the remedial method.
I would recommend that you consult with a tax professional to get this set up so you can handle this on an annual basis along with the required information in item N of the K-1.
As you can see, even basic partnership tax issues are not for the feint of heart.
*A reminder that posts in a forum such as this do not constitute tax advice.
Also keep in mind the date of replies, as tax law changes.
