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BK-CPA
BK-CPA, Certified Public Accountant (CPA)
Category: Capital Gains and Losses
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Experience:  Owner of a CPA firm
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How do I get the partnership tax balance sheet to balance

Customer Question

How do I get the partnership tax balance sheet to balance and have the negative capital accounts of the selling partners be zero? I am preparing a partnership tax return for 2013. Some of the partners sold their partnership interests to other parties during
the year. So the partnership is continuing with its new partners. All of the selling partners had negative capital accounts. How do I get the partnership tax balance sheet to balance and have the negative capital accounts of the selling partners be zero? If
I just reduce the capital accounts to zero for the exiting partners, my balance sheet no longer balances because there is no offsetting entry on the partnership's balance sheet to offset the increase in the capital account (making a negative capital account
zero increases the liability and capital section the balance sheet without an increase in the asset section)
Submitted: 1 year ago.
Category: Capital Gains and Losses
Expert:  BK-CPA replied 1 year ago.
Hello and thank you for your question.
The new partners will typically inherit the capital accounts from the old partners. ie... If I have a negative capital account and you purchase my interest, then you can inherit my negative capital account.
Keep in mind that the new partners' bases in their partnership interests will not be equal to their capital accounts, as basis can never be negative. Where a partner's basis in his/her interest and a partner's capital account are very different things, this is normal and acceptable. Each partner's outside basis in the partnership interest does not show up on Form 1065 or the Schedule K-1's and must be tracked separately by each partner. The partnership has no responsibility to track each partner's outside basis. I make this point because a lot of people find this confusing and end up with problems trying to get the balance sheet to balance, etc.
The balance sheet, with reference to Schedule L of Form 1065, is the balance sheet "per books." Equity is simply going to be the difference between assets and liabilities, noting Schedule L has no bearing on the taxable income of the partnership / partners and need not reflect the partnership's or the partners' tax basis in anything.
In the event you were making some adjustments per IRC 754, etc., the new partners wouldn't simply inherit the old partners' capital accounts. If a partner sells his/her interest back to the partnership, then a negative capital account can be absorbed into the other partner's capital accounts. If a partner sells his/her interest to multiple new partners, the new partners can split the capital account in proportion to the interests purchased. Long story short, there are multiple scenarios.
I hope this helps.
Expert:  BK-CPA replied 1 year ago.
PS - IRC 708 sometimes gets missed on these deals:
https://www.law.cornell.edu/uscode/text/26/708
Let me know if you have any questions, ok?

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