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R. Klein, EA
R. Klein, EA, Enrolled Agent
Category: Tax
Satisfied Customers: 3375
Experience:  Over 20 Years experience
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I am working on a tax return that has two 1065 K-1s. I get

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I am working on a tax return that has two 1065 K-1s. I get confused with this every year. First off, K1 #1, the client is a general partner. In box L, beginnin capital is 13,950. no capital was contributed in 2012.Current year increase is 7725. Withdrawals and distributions is 4883. Ending capital is 16792. Tax basis box is marked.
Box 1, ordinary income is 7725. Line 14A (self employment is 7725)
Line 19A is 4883. and therein lies my delima. This is a final K-1. The more I read the more confused I get. I'm thinking that the 4883. is the sales of his share of partnership. But then I get confused as where to report it, or if I have to report this at all since it is smaller than the capital.

Randalltax :

Thank you for contacting me about your Tax issue. I will work hard to help you understand the issue clearly.

Randalltax :

If you are dealing with a final K-1, then the ending capital for the partner must be 0.

Randalltax :

Did the partnership end? Or did the partner sell his interest to a new partner?

Randalltax :

The profit and loss of the business is not affected, but equity is certainly effected by any dissolution of the partnership or sale of an equity interest by a partner.

Customer:

I spoke to my client about the K-1 this morning and he indicated to me that they have just disolved the partnership. As you said the ending capital for the partner must be 0, but it is not according to the K-1, it is 16,792. I'll give him another call tomorrow to be sure I didn't misunderstand him. But, I still won't know what to do with this 4883. until this issue is resolved, correct?

Randalltax :

Well, obviously distributions will have to deal with the fact that all of the assets have been distributed! It's not just the cash paid out during the time the business was open.

Customer:

I spoke with the CPA who prepared the 1065 for the company and according to him, this is what happened. He said they were in a hurry to close out the corporation before 2013 and that was the reason we have a final K-1. However....he says after the distributions were made and the final return was done there apparently was some cash or assets that were not yet distributed. When I questioned him about the fact that there is still 16,792 left in the capital account, his answer was he had nothing to do with the distribution of final cash or assets. With that being said, and I know that it is not correct, would I just need to proceed with the distribution as a capital gain, or treat it as return of capital. At this point I really don't know what to do, but two heads are better than one.

Randalltax :

Either you will need to amend the 2012 or you will need to make a liquidating event and final distribution in 2013. Those are the options.

Randalltax :

"I was in a hurry so I didn't do it right" is about as lame of an excuse as I can imagine.

Customer:

Well, I agree with you about that being a lame excuse, but the CPA couldn't give me any other explanation. In the meantime I'm sitting here trying to complete this man's 2012 tax return, and I realized that something will have to be done about the remaining cash left in the partnership, but that's not my job. I was not involved in the partnership at all and I can't fix it. My question to you is : Where should I report the 4883. distribution. Schedule D?

Randalltax :

You will need to fix the K-1 first.

Randalltax :

However, any liquidation becomes used to calculate the capital gain or loss on the partnership as an investment (Sch D)

Randalltax :

You will need to know the difference in inside and outside basis to compute any gain or loss

Customer:

I have told the clien that the K-1 needs to be corrected by the CPA that did the return, and until then I can't complete his return with this K-1. We will just need to file an amended return when the K-1 is corrected.

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