Tax Year Prior to 2020: Partner Capital Account

[jhaverlack]

I'm pulling out my hair and hope this is the right place to get a bit of help.

I have a multi member LLC formed back in 2012.  We pay out all net income throughout the year.  We don't have salaries.  Whatever net income is, it is paid out via the partner %.  

Now that we have to file a balance sheet, which started last year, Partner Capital isn't making sense.  I'm sure it is something I've done incorrectly but would like a bit of help.

In 2018, we had $181,814 in net income, all of which was paid out during the year.  Our net income for 2019 is $267,944.  Turbo Tax is listing "Beginning Partner Capital" as last year's net income of $181,814 and wanting to add 2019's net income to it for an "Ending Partner Capital" of $449,758. 

I am trying to reset it to 2019's net income but it is being flagged.  Is the system correct or have I done something wrong?  If we paid out all of the 2018 net income of $181,814, why is it showing that as "Beginning Partner Capital" and adding it to 2019s net income.  Can I fix this?

Thanks so much for any help!

Jeff Haverlack

[Anonymous_]

@jhaverlack You stated that you "paid out all of the 2018 net income" but did you actually make a distribution in the program?

If you merely indicated that the LLC had $X in net profit but did not indicate that the net was actually distributed, the entire amount would flow into the capital accounts.

Review the formula. Again, note that the ending balance of the capital account will basically be partner/member contributions plus profits that have NOT been distributed to the partners.

Initial contribution by partners/members plus additional contributions by partners plus net profit less distributions to partners.

[Taxguy100]

And notice you have an entry in the K-1 Section L on the line, Other Increase (Decrease), TurboTax does NOT pick it up in the calculation of the ending capital account. Have to write over it. Same thing last year. Not sure who to tell.

[VictorW9]

What do you mean by "the profit of $181K was paid out last year"? Of course, you should have paid taxes on the distribution of income for last year, but that does not mean the amount is not in your capital accounts.

What you need to do is to withdraw the cash by reducing the capital accounts of members back to zero before adding this year's distribution of profit. You are required to maintain each partner's capital accounts within the partnership. Balances in these accounts are now being monitored closely by the IRS than ever before.

[Anonymous_]

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@VictorW9 wrote:

What you need to do is to withdraw the cash by reducing the capital accounts of members back to zero before adding this year's distribution of profit.

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The problem is, in the TurboTax Business 1065 module, reducing the capital accounts is not exactly intuitive.

In the 1120-S module, for example, the user is presented with a screen that inquires as to whether any distributions were made. If answered in the affirmative, the user can then input the exact amount of the distribution (e.g., $181,814), the program will do the math, and reduce the RE account accordingly.

In the 1065 module, the user has to do the math ($181,814 divided by however many) and then enter the resulting figure into each partner's capital account separately (under cash or property distributions); it is very easy to miss the screen. Further, many users have no idea that they even need to enter those distributions and the program does nothing to prompt them; it is not sufficiently user-friendly for the uninitiated.

[GalvanizedHoldings]

If I could suggest a solution for the 1065 portion of the Partner's Capital input section, after the user clicks they are "Done" entering the partner capital, there should be a review screen that allows the user to review a summary of entries for All Capital Partners, this way a user can easily go through and do a review and double check of entries for All Capital Partners against their records.  The current way requires that you go back into each indvidual capital partner, reinput all selection on their class and style of involvement in the entity, then look at the entires for percent ownership and capital balances across multiple screens.  This is clunky, hard to use, and easy to make an oversight and needs to be addressed.