Entering Liquidating Distributions in TT Business for a Partnership LLC

[ian6804]

A Partnership LLC with three members (two LLCs and one S-Corp) had a commercial rental property that they were using for their offices, and in 2022, they sold the rental property and dissolved the Partnership.  For the liquidation, there is only cash, there are no non-cash properties/inventory. The liquidating distributions will equal the partners' tax basis.

I am trying to understand where the liquidating distribution is entered in the TT Business 1065 forms so that the distribution is not showing on the K-1s as a taxable item for each of the partners' subsequent 1040 returns.  I've read in this forum (mentioned by @Rick19744) that it should not be listed as a Distribution (K-1, Part III, Line 19), as that is an improper place to report it, but rather it should be listed on a 1099-DIV in Box 9 (Cash Liquidation Distributions). However, in TT Business 1065 forms, there doesn't seem to be a method of adding a 1099-DIV form unless the sold property is listed as an "investment". This property was characterized as Rental Real Estate.  I've contacted TT explaining the situation and they said the form was not supported.

For this situation, is the 1099-DIV form just filled in manually and provided to the partners, or is there some way to generate that form in TT Business? Or is there another field in TT where this liquidating distribution should be entered (perhaps as a Special Allocation decrease in the partners' capital accounts under K-1, Line L and under Sch M-2, Line 7)?

[Anonymous_]

I am certain @Rick19744 will answer as soon as he can possibly do so, but in the interim note that it is obvious you will be filing a final return for the 2022 tax year and will need to indicate that in the program (Business Info>>About Your Business).

Further, TurboTax Business does not support Form1099-DIV (as you were informed by Support). The program only supports Forms 1099-NEC, 1099-MISC, and W-2s.

[ian6804]

Thanks @Anonymous_.

I had checked the box for a final return but forgot to mention it on the post. 

[Mike9241]

I don't agree with @Rick19744 about issuing a 1099-DIv but maybe he has 

IRC 6(b)Dividend defined
(1)General rule
For purposes of this section, the term “dividend” means—
(A)any distribution by a corporation which is a dividend (as defined in section 316); and
(B)any payment made by a stockbroker to any person as a substitute for a dividend (as so defined).042 defines dividends as follows

also in this thread, he says no1099-div is to be issued

https://ttlc.intuit.com/community/business-taxes/discussion/final-1065-k-1-how-to-deal-with-liquidat... 

Without the history it is odd that the capital accounts reflect what you indicate above.

Without going into the complicated discussion of partnership 704(b) regulations, I would say that if you do have $1,200 in cash then that should go to the partner with the $1,200 tax basis ending capital. This results in what I would expect to see in the end. In general, the regulations state that liquidating distributions should be distributed to partners with positive "capital accounts". Note, however, that when the regulations refer to capital accounts this is technically not the tax basis capital account, but I believe you are arriving at the correct result; tax basis capital and "capital account" as referenced in the regulations could be the same but generally not.

You report that on the K-1 as you noted and no 1099-DIV is required.

There is no reporting required when distributions do not exceed your basis.

However, you will need to report the liquidating distribution figure and cost basis on form 8949 and Sch D, but since they offset there will be no gain or loss.

*

also, instructions (they actually have no official standing) for box 19 distributions of k-1 make no differentiation for reporting liquidating distributions. 

* but it's possible he's looking a source material that directly addresses filings for partnership liquidar=ting distributions. The CPA firms I worked with when active never generated 1099-divs for liquidating partnerships but maybe all of them were doing it wrong.  

[Anonymous_]

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@Mike9241 wrote:

The CPA firms I worked with when active never generated 1099-divs for liquidating partnerships but maybe all of them were doing it wrong.  

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Perhaps this is being conflated with corporate liquidations.

[Rick19744]

I agree with the link that @Mike9241 provided to another similar question I responded to.

Additionally, IRS commentary on the 1099-DIV, state the following: Boxes 9 and 10 apply only to corporations in partial or complete liquidation.

In reviewing an IRS LB&I Transaction Unit discussion on partnership liquidating distributions, the discussion indicates that the liquidating distributions should be reported on the applicable K-1 line; cash or other property.

So in conclusion, the LLC liquidating distributions will be reported on Sch K and the applicable K-1.

[ian6804]

My apologies @Rick19744 for misconstruing your reference to corporations as partnerships. I've been reading so many discussions looking for relevant information I must have missed that.

I believe I understand what you are saying.

The Partnership LLC liquidating distributions will be reported on the 1065 Sch K and on Line 19 of the K-1s, and I'm assuming that the tax basis for each partner remains at its positive balance.  Then the tax application will be addressed through Form 8949 and the 1040 Sch D where each partner's positive cost basis will cover the liquidating distribution.  Is that correct?

On a related point, with the distributions liquidating the partnership's accounts, the Sch M-2 will show a zero balance at the "end of the year" as will each of the Balance Sheet line amounts.  Is that correct?

[Rick19744 · Accepted solution]

Replies to your follow-up:

• Not sure what you mean by "I'm assuming the tax basis for each partner remains at its positive balance".
• Any tax implications will be determined at the member level.
• Each member should be maintaining a tax basis schedule.  This schedule will be updated for the applicable items on the final K-1 EXCEPT for any liquidating distributions.
• At the 1040 level, the liquidating distribution of each member will be the "selling" price when entering on form 8949, and the tax basis will be the cost basis.  TT will then determine the gain or loss.
• Technically the balance sheet should be zeroed out and it appears that yours in fact does.

[ian6804]

Rick: I appreciate your follow-ups. I'll try to explain my comments. 

@Rick19744 wrote: 

• Not sure what you mean by "I'm assuming the tax basis for each partner remains at its positive balance".
• Each member should be maintaining a tax basis schedule.  This schedule will be updated for the applicable items on the final K-1 EXCEPT for any liquidating distribution.

I was referencing the "Partners Capital Account Analysis" that is on the K-1 (Line L), but since going back into TT and entering the liquidating distributions for each partner (as a cash distribution), Line L on the K-1s now has an "Ending Capital Account" of zero, not a positive balance as it was prior to entering the cash distributions.   

Each member is maintaining a tax basis schedule, so they will update theirs with the 2022 items except for the liquidating distribution and determine the tax implications on their own 1040s. 

Thanks for the confirmation on the Balance Sheet.  You've helped me a great deal. 

[Rick19744]

Sch K-1 line L makes sense based on your other comments.

You are welcome.