(IRS and State: VA) Schedule K-1 (Form 1065) - handling distributed shares and partnership ending

[jschoomer]

Apologies for the long post... ...

Context (US and state: VA):

1. Wife invested / added $50,000 in 2020 in a partnership with the company where she was working (after her company was bought by a private equity firm). She was a Limited Partner or a LLC member and a domestic partner. Partnership activity was not listed as a business or a rental activity.
2. In 2024, the company went public, and the partnership distributed 3000 shares worth $75,000. The 2024 Schedule K-1 (Form 1065) showed the $50,000 as distribution on box 19 with code C. And then in section L, the beginning capital was $50,000 and withdrawal/distribution was $50,000 and ending capital account was $0. Note that it’s not that the company gave us our $50,000 back in 2024 - the distributed shares were in exchange for the $50,000 investment. The distribution of shares is not reflected anywhere on the K-1; it's in a letter that is accompanying it.
3. In 2025, the partnership ended (final K-1 was checked), and the company gave her a final distribution of 100 shares on 5/8/25 (value: $3000). The 2025 Schedule K-1, section L has $0 as beginning capital account, withdrawal/distribution and ending capital account. Also, Box 19 does not have any code and no amount is listed. The distribution of shares is not reflected anywhere on the K-1; it's in a letter that is accompanying it.

We are using Turbo Tax (TT) to do our MFJ taxes. Can you please confirm if this is correct?

1. For 2024, we entered the values from Schedule K-1 but we did not mention the distributed 3000 shares (value: $75,000) anywhere in my filed taxes - not even on schedule D since we should not be taxed on this until she actually sells those in the future. Also, I did not file Form 7217 - Partner's Report of Property Distributed by a Partnership because my understanding was it was not required if distribution was in shares.
2. For 2025, I am planning on doing the same. Enter K-1 information but not mention the distributed 100 shares (value: $3,000) in the taxes since she did not sell anything. And not file Form 7217 - Partner's Report of Property Distributed by a Partnership,
3. We will mention the distributed shares in our taxes (in the future) ONLY when she does sell (will receive 1099-B) in the future and calculate cost basis correctly.
4. For 2025, since the partnership ended, we selected this (all of the $50,000 investment is considered at risk):
   1. Partnership Disposal method: Complete Disposition
   2. Type of Disposition: Liquidated Partnership Interest
   3. Purchase date: 2020, and Sale date: Date when final distribution was made to her in 2025.
   4. Sale Price: $0, Selling Expense: $0
   5. Partnership basis: $50,000
   6. Ordinary Gain: $0, 1250 Gain: $0
5. After we entered the above, TT calculated the Investment Gain / Loss as follows:
   1. Short-term gain / loss: $0
   2. Long-term gain / loss: -$50,000
6. Because TT is calculating a loss of $50,000, this amount is being deducted from my other equity gains for the year and thus, lowering the taxable amount.

Please advise on whether I am correctly filling out all the info regarding the Schedule K-1 (Form 1065) amounts, distributed shares and TT selections? Let me know if you need more information.

[RobertB4444]

The only thing that you need to change is the partnership basis.  Your basis in the partnership is zero.  You received 3000 shares in exchange for the initial $50,000 investment.  That reduced your basis to zero.  So change that and you will have no loss for the ending of the partnership this year.

When you sell the 3000 shares you will have to enter a basis for them so that you can determine whether there is a gain or loss on the sale of the shares.  Your basis in the 3000 shares is the $50,000 investment that your wife made back in 2020.  It does not come into play - just like the shares - until the sale happens.

So there should be no loss this year.

[jschoomer]

Thanks Robert.

I have been chewing on this, and now I am thinking "Complete Disposition->Liquidated Partnership Interest" is not the correct Partnership Disposal method for my situation. My wife did not liquidate the partnership interest. The partnership ended with her holding on to the shares that she got in exchange for the amount she had invested. So if I select "Disposition was not via a sale", TurboTax (TT) does not prompt me for any sale price or partnership basis so she doesn't need to enter anything because she did not sell anything. TT does ask me for a Purchase date: 2020, and Sale date: Date when final distribution was made to her in 2025, and that's it. The only downside to this approach is that the way TT software is coded - because she selected "Disposition was not via a sale", the K-1Partner Additional Info form marks this as a "gifted partnership interest"! There is no way to work around this, unfortunately. Will this selection have any unintended consequences? She will enter the correct cost basis when she sells the shares in the future.

[RobertB4444]

No, that will be fine since the partnership is going away.  Just maintain the records showing her initial investment and the receipt of those shares and you should be just fine.