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PDtax
PDtax, CPA firm owner
Category: Capital Gains and Losses
Satisfied Customers: 4099
Experience:  Tax professional and business consultant for 34 years
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LLC member sold interest to general member. LLC has accounts

Customer Question

LLC member sold interest to general member. LLC has accounts receivable.
Capital value is negative and sold for $1.
How to show this transaction on form 1065 & both member's K1s.
Submitted: 1 year ago.
Category: Capital Gains and Losses
Expert:  PDtax replied 1 year ago.

Hi from just answer. I'm PDtax, and will assist.

Customer: replied 1 year ago.
Do you have questions?
Customer: replied 1 year ago.
Are you able to answer my questions or you need more information?
Expert:  PDtax replied 1 year ago.
If the interest was sold privately, that is, between owners, the reporting will vary, depending on a few things.
How much of an ownership interest was sold? Did the LLC year terminate?
How did the capital account become negative? What if anything must the selling member do to compensate the LLC? Was there any debt the member was liable for and/or released?
Generally, neither the 1065 nor k-1 does not need to report the sale. The selling member will report the transaction on his/her 1040.
Thanks for asking at just answer. Positive feedback is appreciated. I'm PDtax.
Customer: replied 1 year ago.
the ownership interest is 9.5% and the capital values is negative.
Do I just add the negative capital to the buyer member?
Customer: replied 1 year ago.
no debts.
But the company has account receivable? so it should be as ordinary income. are you sure it doesn't need to show on k1?
then how to calculate ordinary income?
Expert:  PDtax replied 1 year ago.
Since less than 50% changed hands, the LLC did not terminate.
The selling member will have gain or loss. Since there are receivables, or 'hot assets', that member will have some ordinary income as a component of his sake. This is not an LLC income item to be reported by the LLC.
Operating income of the LLC is not affected.
And, the capital account issue is unique to partnerships and LLC forms. I like to use book basis, with a k-1 reconciliation SSDI the member can keep track of their tax basis. This way, the k-1 reports book balances which ages to the book LLC balance sheet figures, so the tax return reconciles.
Thanks again. Positive feedback is appreciated, as it is how we are compensated. I'm PDtax.
Customer: replied 1 year ago.
What do you mean K-1 reconciliation SSDI? also, how does this interest exchange affect the buyer member? Does the buyer member absorb all the negative capital?
Customer: replied 1 year ago.
simple speaking, how to record this exchange on the book?
Expert:  PDtax replied 1 year ago.
Sorry, 'K-1 reconciliation SSDI' should have been 'K-1 reconciliation schedule so'. Spell checker.
For book reporting, the buyer steps into the shore of the former member of you must reconcile the book capital accounts fit K-1 reporting. For tax it is different, starting with their purchase price for tax, which you might never know.
Recording the exchange is easy for books unless the member wants to make a 754 election. Just exchange the equity. In your case, credit Equity - old and debit Equity - new to exchange the negative equity.
Thanks for asking at just answer. Positive feedback will be appreciated. I'm PDtax.

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