What should K1 Part III Item J reflect after partner transfers ownership?

[2Pups]

We have an LLC owned by 4 people equally. Two of them sold their shares to the remaining two, effective 12/31/2024. Should Item J of Schedule K1 Part III be populated as follows?

For the selling S/H:

                Beginning             Ending

Profit      25%                        0%

Loss        25%                       0%

Capital   25%                       25%

For the buying S/H:

                Beginning             Ending

Profit      25%                        50%

Loss        25%                       50%

Capital   25%                       25%

Turbo Tax didn't seem to go through this. It only asked if there was an ownership change - yes/no; had a checkbox for whether the member left the company this year, whether there were more than one date of ownership change in 2024 - yes/no; and what the ownership change date was - 12/31/24.

Turbo Tax populated all four K1s to show 25% in all fields for all 4 members with "final" checked for the two exiting members. Is this accurate? Or should the K1s be updated as shown above or differently?

[PatriciaV]

The ending percentage shown on Schedule K-1 Part II Item J "Partner's share of profit, loss, and capital" is the percentage immediately before the ownership change (per IRS Instructions for Form 1065 Schedule K-1 Item J).

If you look at the Schedule K-1 Worksheet (Sch K-1 Wks), you will see three percentages at the top right of each partner's record. The Ending percentage on this worksheet for the partners who sold will be 0%, but the "Int/Fnl %" is the percentage shown on the K-1's.

Note that the partners who purchased additional interests would have 50% of profit, loss, and ownership after the buyout was recorded.

[2Pups]

@PatriciaV 

Thank you for your response. Per your guidance, it sounds like this is how Sch K-1 Wks should be populated:

For each of the two Exiting Members:

                  Beginning     Ending    *Intl/Fnl %

Profit %      25%               0%            25%

Loss %       25%               0%            25%

Own %      25%               0%            25%

For each of the two Remaining Members:

                  Beginning     Ending    *Intl/Fnl %

Profit %      25%               50%            25%

Loss %       25%               50%            25%

Own %      25%               50%            25%

If this is accurate, Turbo Tax is splitting up profits and losses on Schedule K-1 based on the Ending % and not the *Intl/Fnl % when each Member should be allocated 25% of profits and losses. It looks like the only way I can get Turbo Tax to split profits and losses as 25% per Member is if I keep Ending at 25% for everyone. Please advise.

[PatriciaV]

After the change in ownership, only the leaving partner(s) have Intl/Fnl %. All other partners have their revised percentages in the Ending column. You can see this in Step-by-Step under Business Info >> Partner/Member Information >> Profit Percentages. This table displays before and after columns (but not the Intl/Fnl %). Notice the box and statement at the bottom of that page that allows you to enter other percentages.

When there is a change in ownership, TurboTax assumes that income flow is constant over the year and uses a weighted average to calculate the "effective" profit/loss percentage for the year.

Here is an example, using a four-member partnership with equal ownership at the beginning of the year, which is 25% for each partner. One partner leaves on July 1, resulting in 33.333% ownership for the remaining partners for the rest of the year.

$10,000 net income January-June = $2,500 per partner (25% of $10K)

$ 6,000 net income July-December = $2,000 per partner (1/3 of $6K)

 $16,000 Total Income

Partners One, Two and Three have a total of $4,500 income for the year. This results in an effective income allocation percentage of 28.125% each (4500/16000).

Partner Four has only $2,500 income, because they exited the partnership as of 6/30. This is an effective income allocation percentage of 15.625% (2500/16000).

If you wish to override this allocation, TurboTax allows you to enter one of three allocation percentages under Business Info >> Partner/Member Information. You may use Profit, Loss, or Ownership Percentage to allocate income. The actual percentages are entered under each partner's info. Once you have calculated the effective allocation percentage, you can enter that number under profit or loss, whichever applies.