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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
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Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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Mr. Bell, I am doing a partnership return (1065) via Turbo

Resolved Question:

Mr. Bell,

I am doing a partnership return (1065) via Turbo Tax for a small start-up firm. The llc consists of 4 partners, 1 passive member, 3 managing members. The passive member put relatively substantial cash into the company ($30K), strictly on an investment basis (only has economic rights), the other 3 actively participated in the partnership due to their expertise in the industry but only put $50 dollars cash a piece establishing their capital accounts.

The llc did not generate any income, and only incurred development expenses for the tax year. I was surprised to see that Turbo Tax allocated losses to the three (3) active member managers when the losses exceeded their capital contributions.

Is this correct?

The k1s Turbo tax is generating shows losses
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

Lane :

Hi,

Customer:

Hi Lane, did you receive my question?

Lane :

Sure, any partner's share of partnership income, gain, deduction, loss or credit is set by the partnership agreement (which could actually even be oral) ... (although that could cause some evidentiary problems) ... 704(a) lets partners choose how these things re allocated

Customer:

So their partnership is setup that their % of ownership and % of profit/loss is 30/30/30/10, the 10% member is passive. They generated a large loss and the active members each received 30% of this loss, but I'm worried since the 3 active members only contributed $50 each and are getting $4,000 in loss allocated to them. Is this really correct?

Lane :

No, it's correct ... capital accounts are for partnership accounting not for the tax books

Customer:

thanks so much Lane, you're the best :)

Lane :

YW

Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4373
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 2 other Tax Specialists are ready to help you
Expert:  Lane replied 1 year ago.

Here's one of the best word smithing I've seen on this:

Capital accounts are generally created by partnership agreement and help determine a partners rights to the money and property of the partnership and often measure what a partner has put into a partnership. Because capital accounts help determine amounts that a partner is entitled to receive upon a sale or liquidation, it is important to ensure the following points:

Capital accounts, as opposed to basis, can be negative,
A partner's share of liabilities is not reflected in the capital account. Upon initial contribution, assets net of any liabilities will be reflected in the capital accounts.

Capital accounts do not always reflect the true value of a partners interest. Fluctuations in fair market value are not usually reflected in the balances.

Capital accounts are a partnership accounting mechanism and not a tax mechanism.


Thanks

Lane

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Lane
Lane
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Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986