remove partner, how to fill out k1

[Ftprntz]

We have a partnership of 3 people.  2 people (husband and wife) have bought out the third. This happened 12/16/22. On the k1, is the purchase price recorded as guaranteed payments? For part J, is the ending percentage still 50% because they take the average of the 12 months? If he did no work for the last 12 months, is there a way to not have him receive his 50%? Do we both have to attach a statement to the taxes about buying out the partnership?

[PatriciaV]

No, the buyout is not a partnership transaction other than the change in ownership. The sale involved the individual investors and should not have involved partnership funds.

For the period 1/1/22 through the day before the sale 12/15/22, the partnership had three partners with no change in ownership or profit/loss allocations. From 12/16/22 through the end of the year, there were two partners with adjusted ownership and profit/loss allocation percentages.

The Partnership Agreement governs how this transaction might affect income/loss allocations. In general, no change would be made prior to the change in ownership. After the sale, only the remaining partners receive income.

In TurboTax, report the change of ownership under Business Info >> About Your Business >> Has an Ownership Change = Yes.

Under Partner/Member Information, you will need to check the box for "This member left the company this year" for the partner who was bought out.

TurboTax will prompt you for the date of the ownership change and the profit/loss percentages after the change. Be sure the new percentages total to 100%.

TurboTax uses a weighted average based on days of ownership to allocate profit/loss to the members. Be sure you review the final allocations that are summarized on the Schedule K Reconciliation worksheet. Because the change in ownership occurred late in the year, the difference in income allocations may be less than you expected.

In summary, the purchase price is not reported on the partnership return. All partners will receive an income allocation for the year based on the days of ownership. TurboTax will report this change in ownership as required by the IRS.

Note that the remaining partners will need to adjust their "outside" basis, which is their total investment in the partnership, for the purchase of the third partner's share. This affects the partner's own records of the investment, not the information held within the partnership, and may not be the same as the balances shown on Schedule K-1 Part II Section L (if included).

[Ftprntz]

Hi Patricia,

This is really helpful, thank you.

1. If we did pay him for the buyout out of the business, what now?

2. He did no work for the year 2022, can I just put his percentages at 0% on the profit loss allocations (beginning and end)?

3. My husband is not listed as a partner on the taxes. Should I add him as a partner on the taxes? He is a partner on the partnership agreement. We are the only two remaining partners.

4.  The remaining partners need to  adjust their "outside" basis. I'm assuming we do that on our personal taxes?

Thanks,

Sarah Frey

[PatriciaV]

1. If partnership funds were used to "buy out" the other partner, this transaction would be a deemed distribution to the remaining partners. In other words, the partnership distributed the funds to the buying partners who used them to buy out the other partner. Divide the total amount between the two remaining partners and enter as cash distributions to those partners under Partner/Member Information.

2. Many partners are not active in their investments and still receive income allocations. If that is not the case for your partnership, this allocation adjustment must have been spelled out in the partnership agreement. Otherwise, the exiting partner would have income/loss reported for the year on Schedule K-1.

3. Every partner who is listed in the partnership agreement must be included on the tax return and receive Schedule K-1, even if they are not active or are a "silent" partner.

4. Yes, outside basis can be used on the partner's tax return. TurboTax will ask for this information when entering Schedule K-1 for Form 1040.

[Ftprntz]

Hi Patricia,

This is so helpful!

As for item number 1, I entered the buy out as cash distributions.

In order for Turbotax to stop giving me errors, on the Schedule K reconciliation, I counted the distributions as Guaranteed payment Capital. Is that correct? I'm not getting the error anymore, but that number shows up in red. It's also showing up in red on the Form 1065 page 4-5 screen.

Thanks,

Sarah 

[PatriciaV]

No, distributions are not guaranteed payments. Red numbers on your forms will prevent you from e-filing and invalidate the TurboTax Guarantees.

Distributions should be entered under Business Info >> Partner/Member Information >> Member Capital on the Cash Distributions line. You'll enter an amount for each partner separately. Using the step-by-step interview screens is the best method to ensure the information flows to the correct form.

You can confirm your entries in Forms Mode, but we highly encourage you to use the interview when entering activity for your partnership.

[Ftprntz]

I feel like I'm learning how to use Turbotax, thanks for the tips!

We bought out my partner, and he would like to show that some of the money he took out was capital. Does he need to take that as guaranteed payments for capital, of does he just state that part of it is capital when he's doing his personal taxes?

Do we need to fill out form 8594? 4797? The turbotax hints are talking about those forms. 8594 shows up on the list of forms that came up automatically.

For the k1 part III Line 20 we're using code AB for 751 Gain/Loss. Does that sound right?

Thanks,

Sarah

[AliciaP1]

He should have been tracking his basis in the partnership (essentially his capital) personally, so when he reports the Schedule K-1 and the buyout, the appropriate amount of return of capital gets reported.

No, you do not need to complete either Form 8594 or Form 4797 unless part of the buyout was business assets other than cash.  

And finally, you will use Box 20 Code AB for the value of outstanding receivables and inventory in the buyout and Code AD for the value of the depreciable property in the buyout.

See Box 20 Code AB, AC, AD for more specific information.

@Ftprntz 

[Ftprntz]

I virtually submitted my business taxes, but now the turbotax person advising me with my personal taxes said my k1 that I created for my business is probably wrong.

We have a simple partnership and my husband and I bought out the 3rd person for $7400 December 16, 2022. The third partner was a limited partner for 2022.

My husband and I both have k1s that say

Part III line 1: 5710

Line 4a 4400

14 A 10110

Distributions 19A 5710

We paid out the partner 7400, but paid him out of the business bank account. I was going to take that out of the distributions by not paying myself that much, but then the sale doesn't show up correctly for the personal taxes.

I thought distributions meant the amount that you are paying yourself and not leaving in the business as capital.

[Vanessa A]

I thought distributions meant the amount that you are paying yourself and not leaving in the business as capital.  They are.  Distributions, are the amounts that are distributed to the partners whether it be cash or securities or other assets.  But, also in your case, because you paid the other partner $7,400, your distributions should be a part of that. 

So, if you you and your husband are now 50/50 partners and before were 1/3, 1/3, 1/3, you would split that $7,400 between you and your husband and count that your distributions because you basically used the business account to make a "personal" purchase when you bought more of the business. It would be the same as if you used the business account to go buy stock in Intuit, this would be money you used for your personal benefit, not that of the business so it is money you took out.  So, if you actually took $5,710 in cash each, and did not include the buyout, you would increase your distributions by $3,700 for a total of $9,410.

If you need to make changes to your business return, you can amend your 1065 and K-1's by going back into the program and clicking Amend a Tax Return on the home screen right under where you see your tax return.