How do I report a 3 partner llc buyout of 1 member?

[Amchan13]

I had a 3 partner LLC with 75%, 20% and 5% ownership. The 20% was bought and paid out $20,000 from the company. New ownership is 95% and 5%. I entered all the percentage information into TurboTax but the K-1 does not show final for the bought out member. Also where do you account for the $20,000 payout?

[Amchan13]

Also the k-1 still shows ending % at 20% for buyout member but other member shows 95% and last member still at 5%. Is that correct?

[DavidS127]

Yes, the 20% reported at the end of the year for the member who sold their interest is correct for the Schedule K-1 percentage.  According to the IRS Instructions for Form 1065 K-1 at this link, and copied here:

“Generally, the amounts reported in item J are based on the partnership agreement. If your interest commenced after the beginning of the partnership's tax year, the partnership will have entered, in the Beginning column, the percentages that existed for you immediately after admission. If your interest terminated before the end of the partnership's tax year, the partnership will have entered, in the Ending column, the percentages that existed immediately before termination.” (emphasis added)

The $20,000 payout to buy the partnership interest is not an expense of the partnership, but rather a transaction between the two partners (members).  If the $20,000 was paid from the partnership, it is a distribution to the member who purchased the 20%.  In other words, the 75% partner took a distribution of $20,000 from the partnership to buy out the 20% partner.

[micheleburke2019]

How do you handle a partner buyout paid out of company proceeds with 3 remaining partners and only two sharing the buyout %? Also, are there any tax implications to remaining partners?

[Anonymous]

there are tax consequences that need to be reported for the selling partner such as section 751 gain.  we can't see the partnership agreement or the tax return.  there are also adjustments that the buying partners may need to make that probably will affect their taxable income. you need a tax pro so you know that everything is properly reported. 

[Mybesttaxservice]

Hello Davis ,

What forms or any concern should you advise me for this similar question?

Such as 

1. Disclosure to IRS about transfer interest, what forms? 

2. Tax consequences 

3. Report K 1 for each partners (existing partner A, added partner D and no-longer partners of B and C)

The facts are 

Existing Partner A 75%, Partner B 20% and Partner C 5% beginning 2023 . Capital of the partnership is 100k (I made up the number for easy calculate)

Partner A  and new partner D buy out interest of B and C  (D give A 25k , B  20k and C 5K)

After transfer interest on August 2023, partner A  50% and new partner D 50% (capital each 50k/50k). Distributed money to partner B and C exact the amount they put in capital initial $20k and $5k . B and C has NO GAIN OR LOSS

Your advice would be appreciate 

I love Turbo tax and Intuit community 

[Mike9241]

see a pro because you probably are not adhering to the Code unless there were no profits for 2023.  the code requires allocation of profit or loss on based on weighted average % owned for whole year or if all the partners consent then a specific cut-off where income/loss is allocated based on weighted average ownership but only on the profit/loss through the date of buyout. 

also, if the partners bought the partners out rather than the partners contributing money to the partnership and the partnership redeeming their others interests then a section 754 election may be available but we lack information. 

[Mybesttaxservice]

Hello Mike 

Thank you for your info

That would help me to searching IRS section 754 election relating to  section 734 (b) transfer of property or 743(b) transfer of interest

I also to search more info of form 15242 to revoke 754 election

Yes the partnership has two properties about 600k which they got rental income /loss in 2021 and 2022 and depreciated  two year because they started in 2021.  The recovered depreciation gain  would count in for B and C . 

Thank again Mike