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I have a general question about how to dissolve a

I have a general...

I have a general question about how to dissolve a partnership - just a simple one - no crazy stuff. I need to know about the liquidating cash distributions, how the K-1 looks, how the Schedule L looks, as well as a property distribution in the same partnership.

Accountant's Assistant: The Accountant will know how to help. Is there anything else the Accountant should be aware of?

I'm a CPA for 5 years and partnerships are not my specialty. I've taken CPE before with partnerships in mind but I can't seem to ever get good, simple examples to gain more insight on this part of tax- this is what I'd like - examples! :)

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Customer reply replied 5 months ago
Example:
3 partners. - each partner shares 1/3 of profit/loss/capital accounts.
Each contributed 1,000 during the year.
The partnership had net income 12,000 during year.
Partnership bought a 3,000 trailer
Trailer depreciation is 1,000 - basis at end of year - 2,000
Partnership liquidates and dissolves.
Before liquidation - each partner has 4,000 outside basis as of 12/31/17
There is (let's say) $10,000 in cash at end of year to distribute for liquidation.
There are no liabilities (thank god)
Partner A get's the trailer (adjusted basis is 2,000)Question: That is a non-taxable event to partnership, correct? He assumes the basis of the trailer for himself and if he sells at a later date, gets the gain (not loss because a capital asset without a business?) then?Okay, next question: Each partner has to pay tax on the 4,000 dollars of taxable income. Since they are liquidating, how the heck do you "split" out 10,000 between 3 partners? Evenly? If so, each get 3,333 and will still have outside basis in the partnership (667 remaining). How does this show on the Schedule L of the return and the K-1's? Would they all get a capital loss since of 667 to clean up basis?Question 2.5: Does a Schedule L on a partnership/s-corp look completely blank on the final year no matter what?Question 3: what happens (and is it even allowed) if the partners decide to give partner A 7,000 partner B 2,000 and partner C 1,000 - Is this allowed? Do I need to change the profit/loss/capital percentages to compensate (they told me it was originally 33.3% for each)Question 4: Assuming you CAN do what is in question 3, partner A would have a 3,000 capital gain (short term), correct? partner B would have a 2,000 loss? and partner C a 3,000 loss? Is this the right mindset here, or am I making it simple because I want it to be simple.Question 5: is liquidating the same as dissolving?Thanks so much for helping! I've taken numerous CPE courses and I know a little of "theory" but no solid examples to back it up with - and I finally have a partnership client that is dissolving this year, so I'm excited to do it right! If I can get this simple stuff down, I'll ask about section 754 next :)
Answered in 1 day by:
3/10/2018
Dr. Fiona Chen
Dr. Fiona Chen, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 1,489
Experience: Former IRS Revenue Agent
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I'm Fiona, former IRS revenue agent. I am looking at your question and will get back to you soon. Fiona Chen, MPA, Ph.D., CPA, ABV, CFF, CITP,IMTA

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Dear Customer,

When I clicked on the question, this is what I saw, " have a general question about how to dissolve a partnership - just a simple one - no crazy stuff. "

Well, when I read on, there are five questions by a exciting CPA wit the new client and with a smile face in the end.

I will offer premium service to work with you if it is acceptable for you. Otherwise, you can opt me out from your end.

Thank you.

Regards,

Fiona

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Customer reply replied 5 months ago
I'm sorry, what does that mean? I'm new to this. The first question was because I would like to know how to dissolve a partnership on a tax return. The second part was a breakdown so I can give you an example to explain it.
What do I need to do to get this answer right away? I would love to use you, but I don't know if you mean I have to pay more.Please let me know.
Customer reply replied 5 months ago
PS - I am the CPA who doesn't know the answer - that's why I'm asking this website.

Dear Customer,

When I mentioned premium service, it was going to have you pay more.

There seem to be more than one question and some examples which need further detailed exploration.

Please opt me out from your side of the screen.

Maybe there are other experts who can address the issue with the asking price of the question.

Thank you.

Regards,

Fiona

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PDtax
PDtax, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 5,127
Experience: 35 years tax experience, including four years at a Big 4 firm.
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Hi from Just Answer. I'mCustomer I see you need a new expert. I'm going to try and help with your primary question for the price deposited.

When a partnership liquidates, I like to present the final balance sheet on the 1065 before liquidating distribution. That means remaining cash, assets, debts and capital are reported. Here's why:

This will allow the distributions out to partners to have a reconciling 'home', that is, the partners see what is being split up. So does IRS. Since it goes out at no gain or loss to the partnership, it gives a basis for partners to report their gain or loss on liquidation personally. And privately.

That means the final K-1 distributes only the last year income or loss, and you can discolse each partner's tax basis on the K-1 before the final distributions are made. that will give each partner and IRS all they will need to see the liquidation gain/loss.

Since the other questions you posed were examples, I passed on them. I hope this is all you needed.

If so, positive feedback, five stars' worth, is appreciated. I'mCustomer

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Customer reply replied 5 months ago
Customer- thanks so much. I never new that would be allowed - showing any balance on the final year schedule L. So thank you for that insight. So you're saying that on the K-1, there will be an ending capital account on the lower right part L?The example I included was for follow-up questions I had on the dissolving of the partnership - obviously there is a lot that happens, so I just want the basics and my example was necessary to voice my concerns I had. I would like to have this example looked at and answered.I just called for the second time to Just Ask support and they told me that the expert should answer these followup questions.Could you do this please?If, for some reason I need to pay more, please let me know how to pay more and I will do it. If you do not want to answer the questions like Fiona did not, please let me know and I'll opt out again.

I'll offer a premium service to address your extra questions. I'll be able to help on them tonight, if that's OK.

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Offer posted.

Customer/p>
PDtax
PDtax, Certified Public Accountant (CPA)
Category: Tax
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Customer reply replied 5 months ago
Awesome! Thanks so much. Please, please please, take your time with the answers like you did with the first one. I'll let you know if I need any expanded but if you flesh out the answers as best you can that is all I would request.In addition, could you answer the follow up question I had about the tax basis portion of the K-1 - that there will be an ending balance in that portion of the K-1. How would the IRS know what the ending distribution is if there is an amount in there?

Example:
3 partners. - each partner shares 1/3 of profit/loss/capital accounts.
Each contributed 1,000 during the year.
The partnership had net income 12,000 during year.
Partnership bought a 3,000 trailer
Trailer depreciation is 1,000 - basis at end of year - 2,000
Partnership liquidates and dissolves.
Before liquidation - each partner has 4,000 outside basis as of 12/31/17
There is (let's say) $10,000 in cash at end of year to distribute for liquidation.
There are no liabilities (thank god)
Partner A get's the trailer (adjusted basis is 2,000)

Question: That is a non-taxable event to partnership, correct? He assumes the basis of the trailer for himself and if he sells at a later date, gets the gain (not loss because a capital asset without a business?) then?

Okay, next question: Each partner has to pay tax on the 4,000 dollars of taxable income. Since they are liquidating, how the heck do you "split" out 10,000 between 3 partners? Evenly? If so, each get 3,333 and will still have outside basis in the partnership (667 remaining). How does this show on the Schedule L of the return and the K-1's? Would they all get a capital loss since of 667 to clean up basis?

Question 2.5: Does a Schedule L on a partnership/s-corp look completely blank on the final year no matter what?

Question 3: what happens (and is it even allowed) if the partners decide to give partner A 7,000 partner B 2,000 and partner C 1,000 - Is this allowed? Do I need to change the profit/loss/capital percentages to compensate (they told me it was originally 33.3% for each)

Question 4: Assuming you CAN do what is in question 3, partner A would have a 3,000 capital gain (short term), correct? partner B would have a 2,000 loss? and partner C a 3,000 loss? Is this the right mindset here, or am I making it simple because I want it to be simple.

Question 5: is liquidating the same as dissolving?

In addition, could you answer the follow up question I had about the tax basis portion of the K-1 - that there will be an ending balance in that portion of the K-1. How would the IRS know what the ending distribution is if there is an amount in there?

Please confirm this is the list to address, and I will work on these later this evening.

Customer/p>
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Customer reply replied 5 months ago
Please also respond to the first follow up question I had as well.Thanks! :)

I'm not sure what to add to my list. Can you type your additional question out so I can look at everything tonight?

Thanks.

Ask Your Own Tax Question

Example:
3 partners. - each partner shares 1/3 of profit/loss/capital accounts.
Each contributed 1,000 during the year.
The partnership had net income 12,000 during year. This is 13k - 1k depreciation.
Partnership bought a 3,000 trailer
Trailer depreciation is 1,000 - basis at end of year - 2,000
Partnership liquidates and dissolves.
Before liquidation - each partner has 4,000 outside basis as of 12/31/17 NO -$5,000
There is (let's say) $10,000 in cash at end of year to distribute for liquidation.
There are no liabilities (thank god)
Partner A get's the trailer (adjusted basis is 2,000)

Question: That is a non-taxable event to partnership, correct? He assumes the basis of the trailer for himself and if he sells at a later date, gets the gain (not loss because a capital asset without a business?) then? Asset goes out to him at book value; no gain or loss is recognized on liquidation. If placed in service in a business, carryover basis and depreciation amount and method. If/when he sells, gain or loss is determined at that time.

Okay, next question: Each partner has to pay tax on the 4,000 dollars of taxable income. Since they are liquidating, how the heck do you "split" out 10,000 between 3 partners? Evenly? If so, each get 3,333 and will still have outside basis in the partnership (667 remaining). How does this show on the Schedule L of the return and the K-1's? Would they all get a capital loss since of 667 to clean up basis? Remember I suggested the final balance sheet show the cash, in your example the trailer, and debt/equity? In this example, you have 10K in cash, an asset with nbv of 2,000, and three partners with equity of $5,000 each. Send each partner $4,000 in value after the final balance sheet is reported. Each will recognize $1,000 personal capital loss.

Question 2.5: Does a Schedule L on a partnership/s-corp look completely blank on the final year no matter what? Keep the assets reported there at the final reporting period, but before liquidation. There should be assets, liabilities and equity, as outlined earlier.

Question 3: what happens (and is it even allowed) if the partners decide to give partner A 7,000 partner B 2,000 and partner C 1,000 - Is this allowed? Do I need to change the profit/loss/capital percentages to compensate (they told me it was originally 33.3% for each). Only if the partnership agreement mandates. The partners can modify their agreement, but the distribution must follow the agreement.

Just a practice tip - there is nothing to stop partners from making other arrangements to their liking after they receive their distributions. G

Question 4: Assuming you CAN do what is in question 3, partner A would have a 3,000 capital gain (short term), correct? partner B would have a 2,000 loss? and partner C a 3,000 loss? Is this the right mindset here, or am I making it simple because I want it to be simple. If the agreement mandates, you can and should have different gains/losses.

Question 5: is liquidating the same as dissolving? almost. Dissolving is the act of notifying the secretary of state to formally dissolve. Liquidating is the distribution before dissolution. But the terms are often used by laymen to describe one or both of these two actions.

In addition, could you answer the follow up question I had about the tax basis portion of the K-1 - that there will be an ending balance in that portion of the K-1. How would the IRS know what the ending distribution is if there is an amount in there? The IRS will see the final balance sheet pre-liquidating distribution

Please review and post any additions to the list.

Customer/p>
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Customer reply replied 5 months ago
Customer- awesome. (By the way, I WAS wrong - it should have been 5,000 basis end of year - whoops!) And what a great tip about the distributions after the "formal" way to distribute - I was going to mention that to the client but thought that might be bad to do...Quick followup - I don't understand this answer:
Okay, next question: Each partner has to pay tax on the 4,000 dollars of taxable income. Since they are liquidating, how the heck do you "split" out 10,000 between 3 partners? Evenly? If so, each get 3,333 and will still have outside basis in the partnership (667 remaining). How does this show on the Schedule L of the return and the K-1's? Would they all get a capital loss since of 667 to clean up basis? Remember I suggested the final balance sheet show the cash, in your example the trailer, and debt/equity? In this example, you have 10K in cash, an asset with nbv of 2,000, and three partners with equity of $5,000 each. Send each partner $4,000 in value after the final balance sheet is reported. Each will recognize $1,000 personal capital loss.You say send 4,000 "in value" to each partner. How did you get the 4,000 for each partner - 10,000 plus the 2,000 nbv divided by 3 partners? How is the trailer, which is given to Partner A factored in to this decision? If the trailer wasn't given to Partner A how do they normally split up capital assets like this between multiple people?(I messed up the example since they only have 12,000 in assets and 15,000 in equity).
So the example will change to 13,000 in cash, 2,000 nbv of trailer and 15,000 in equity between the three.
If Partner A gets the trailer, doesn't that leave 13,000 to be distributed evenly between the 3 partners? Or as you say, 13,000 in value? (Am I messing up what you keep telling me - that the trailer is on the balance sheet at the end and to factor the nbv in at the end)
Partner A gets the trailer - no issues there - it still shows on the balance sheet for the IRS to see for themselves.
Partners A, B, and C all get 4,333 in value and will show a 667 personal capital loss each.
Correct? Or no.

Quick followup - I don't understand this answer:
Okay, next question: Each partner has to pay tax on the 4,000 dollars of taxable income. Since they are liquidating, how the heck do you "split" out 10,000 between 3 partners? Evenly? If so, each get 3,333 and will still have outside basis in the partnership (667 remaining). How does this show on the Schedule L of the return and the K-1's? Would they all get a capital loss since of 667 to clean up basis? Remember I suggested the final balance sheet show the cash, in your example the trailer, and debt/equity? In this example, you have 10K in cash, an asset with nbv of 2,000, and three partners with equity of $5,000 each. Send each partner $4,000 in value after the final balance sheet is reported. Each will recognize $1,000 personal capital loss.

You say send 4,000 "in value" to each partner. How did you get the 4,000 for each partner - 10,000 plus the 2,000 nbv divided by 3 partners? How is the trailer, which is given to Partner A factored in to this decision? If the trailer wasn't given to Partner A how do they normally split up capital assets like this between multiple people? The asset would be sold, let's assume for $2,000, and the total cash split three ways.

(I messed up the example since they only have 12,000 in assets and 15,000 in equity).
So the example will change to 13,000 in cash, 2,000 nbv of trailer and 15,000 in equity between the three.
If Partner A gets the trailer, doesn't that leave 13,000 to be distributed evenly between the 3 partners? Or as you say, 13,000 in value? (Am I messing up what you keep telling me - that the trailer is on the balance sheet at the end and to factor the nbv in at the end) let's use 13K in cash and your asset with nbv of 2,000. $15,000 total, to divide three ways.

If a partner agrees to take the asset for $2,000, and that is agreeable to all parties, then that partner gets $2k asset and $3K cash, then the other two partners get $5,000 each. $13k cash, 2K nbv asset is $15k.

Partner A gets the trailer - no issues there - it still shows on the balance sheet for the IRS to see for themselves.
Partners A, B, and C all get 4,333 in value and will show a 667 personal capital loss each.
Correct? Or no. NO. 15k total to be divided, one partner taking $2k nbv asset for that value in lieu of $2k cash.

It might be easier to think of the partnership selling the equipment for $2k, then distributing $15k, 5K each, to the three partners. The only difference is in what is distributed to the one partner who chose to take the equipment and less cash to make up his equal share.

Customer/p>
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Customer reply replied 5 months ago
Man,Customer- you honestly don't know how much this helps me!!!!Okay, last follow up. I promise. Here's question #3
Question 3: what happens if the partners decide to give partner A 7,000 partner B 2,000 and partner C 1,000Okay, so just so I can put your teaching to the test!They each have $5,000 in equity in the partnership at the year end. (13,000 in cash and 2,000 trailer)
Partner A takes 7,000 cash/value - his basis was 5,000 so he will have a short term(or long term) capital gain for 2,000 (trailer is 2,000 nbv plus 5,000 cash)
Partner B takes 2,000 in cash/value - takes a 3,000 capital loss
Partner C takes 1,000 in cash/value - takes a 4,000 capital lossCorrect? Fingers crossed...

You are mixing several examples. Let's try this:

$13k in cash, $2k nbv trailer, 3 partners with $5,000 equity in their interests. Net of all should be $0 gain.

Instead of 7,2 and 1, let's use7,5 and 3.

partner A receives $5k in cash and the 2K trailer. $2k capital gain.

partner B receives $5k cash. $0 cap gain.

partner C receives $3K, $2K loss.

Add up all the gains and losses, and it adds to $0, like it should.

Customer/p>
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Customer reply replied 5 months ago
lol! Yes, it needed to be $15,000 not the $10,000. Great, I failed my last test. Ah well, it can only get better I guess.
Customer- you are a wonderful, patient person and I thank you greatly for the information.Could I ask you later in the year for information on liabilities, interest buying/selling, partner retiring, and adjusting basis? Or do I have to just get lucky? I have plenty of other questions.Thank you again.

You're welcome.

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Disclaimer: Information in questions, answers, and other posts on this site ("Posts") comes from individual users, not JustAnswer; JustAnswer is not responsible for Posts. Posts are for general information, are not intended to substitute for informed professional advice (medical, legal, veterinary, financial, etc.), or to establish a professional-client relationship. The site and services are provided "as is" with no warranty or representations by JustAnswer regarding the qualifications of Experts. To see what credentials have been verified by a third-party service, please click on the "Verified" symbol in some Experts' profiles. JustAnswer is not intended or designed for EMERGENCY questions which should be directed immediately by telephone or in-person to qualified professionals.

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