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PDtax, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 4625
Experience:  35 years tax experience, including four years at a Big 4 firm.
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We bought out a member of a multi-member llc, taxed as

Customer Question

We bought out a member of a multi-member llc, taxed as partnership, for $500K more than her capital account. Generally speaking, what are the journal entries? Does it create goodwill?
Submitted: 2 years ago.
Category: Tax
Expert:  PDtax replied 2 years ago.

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

The purchase of an interest by the entity can be pretty complex. Retention of the interest, resale to the partners, retirement, the assets repurchased all make this complicated. Sorry, but this will take some technical time and review to assist properly.

Expert:  PDtax replied 2 years ago.

I will offer you a 1/2 hour consult to review your transaction and assist. That assumes you need the tax side of things.

If ask you want is the book side, you don't create goodwill on your own assets, but a negative partner Equity debit.

Customer: replied 2 years ago.
Just the book side. I did credit cash and debit her (former member) capital account $500K more than her balance (that's the actual pay out). Question is, what entries do i need to do to close out her capital account? Do I allocate the $500K negative equity among the remaining LLC members? You sure not debiting $500K goodwill?
Customer: replied 2 years ago.
I am thinking debiting goodwill, because members agreed to buy out, but do not want change to their current capital balances and ownership percentages, so this is like buying back company shares but not to re-allocate among existing members.
Expert:  PDtax replied 2 years ago.

The book entry is a debit to the remaining partner equity.

Allocate the 500k in the ratio of their remaining interests. Let's say you bought out a 20% partner for $550,000, and his Equity for books was 50k:

Expert:  PDtax replied 2 years ago.

Partner a (40%) 250,000 (debits)

Partner B (40%) 250,000

Partner C (20%) 50,000

Cash. 550,000 (credit)

Customer: replied 2 years ago.
Okay in my case such entries will leave Partner A and B with negative equity/capital account balance (the DR will wipe out current capital balance and more). Is it okay to have negative capital balances? Will that be viewed as distributions?
Expert:  PDtax replied 2 years ago.

These will not be considered distributions. You are just making book entries. They will have no tax impact. the tax gain or loss is much different, as mentioned earlier.

Thanks again. Positive feedback is appreciated. I'm PDtax.