Originally Posted by lmayo1
She is still technically a co-owner/operator and has been receiving monthly dividend (distribution?) checks for the buyout, until she receives their agreed-upon price, but she doesn't receive any other hourly pay or salary. She now works a different job in another state.
A partnership’s income, losses, deductions, and credit are passed through to the partners for Federal tax purposes and taxed directly to them, regardless of when income is distributed. A partnership distribution is not taken into account in determining the partner's distributive share of partnership income or loss. If any gain or loss from the distribution is recognized by the partner, it must be reported on his or her return for the tax year in which the distribution is received. in general, buyouts are included as an item of gross income and are considered as fully taxable income under IRS tax laws. The tax treatment of the partnership buyout depends on the composition of the partnership’s assets at the point of dissociation. If the partnership’s assets at the time of dissociation include receivables or inventory, some of the partners’ proceeds will be treated as ordinary income. Unrealized receivables include any right to payment the partnership has for goods already delivered or services already provided. The proceeds from the sale that correspond to the partnership’s receivables or inventory are treated as ordinary income. For example, if a partnership had $100k in assets at the time of dissociation and $10k of those assets were inventory, 10 percent of the dissociated partner’s proceeds is ordinary income. After deducting the receivables and inventory amount from the proceeds, the capital gain or loss is calculated by subtracting the partner’s basis from the remainder.