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Old 01-05-2014, 04:23 PM
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K1 Ending Capital Account Balance

Hello All,

I was part of a partnership for 2012 and 1 month of 2013. The partnership put operations on hold in January 2013, so I moved on to other opportunities. "I transferred by ownership (10%) for $100". Its in quotes because it didnt actually happen, its just what the minutes said that I had to sign. My K1 for 2012 had a ending capital account of 26k. I was told I would get a K1 for 2013 that shows this as 0. My question is this a taxable event? I never contributed cash as capital to this partnership, but I was paid distributions and guaranteed payments for my involvement in 2012. My former partner has been less than helpful in explaining how this works. Any info is much appreciated!

J



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Old 01-06-2014, 11:55 AM
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Originally Posted by speedracer350 View Post
Hello All,

#1;I was part of a partnership for 2012 and 1 month of 2013. The partnership put operations on hold in January 2013, so I moved on to other opportunities. "I transferred by ownership (10%) for $100". Its in quotes because it didnt actually happen, its just what the minutes said that I had to sign.



#2; My K1 for 2012 had a ending capital account of 26k. I was told I would get a K1 for 2013 that shows this as 0. My question is this a taxable event? I never contributed cash as capital to this partnership, but I was paid distributions and guaranteed payments for my involvement in 2012. My former partner has been less than helpful in explaining how this works. Any info is much appreciated!

J
#1; Once written up (or typed) in a minute book and approved at the next meeting, the minutes are accepted as a true representation of the proceedings they record and can be used as prima facie evidence in legal matters. Approval of the minutes is usually done with very little, or no, discussion. However, in some cases, such as if there is a highly contentious issue or an error, there can be a considerable amount of discussion


#2;Your basis in the partnership is zero UNLESS you contributed cash( give a loan) as capital to this partnership.A partnership distribution is not taken into account in determining your distributive share of partnership income or loss. If any gain or loss from the distribution is recognized by you, it must be reported on your return for the tax year in which the distribution is received. Money or property withdrawn byyou, as a partner, in anticipation of the current year's earnings is treated as a distribution received on the last day of the partnership's tax year.You, as a partner, generally recognize gain on a partnership distribution only to the extent any money (and marketable securities treated as money) included in the distribution exceeds the adjusted basis of your interest in the partnership. Any gain recognized is generally treated as capital gain from the sale of the partnership interest on the date of the distribution. If partnership property (other than marketable securities treated as money) is distributed to you, you generally do not recognize any gain until the sale or other disposition of the property.For example, assume that The adjusted basis of your partnership interest is $14K. You receive a distribution of $8K cash and land that has an adjusted basis of $2K and a fair market value of $3K. Because the cash received does not exceed the basis of yourr partnership interestof $14K, you do not recognize any gain on the distribution. Any gain on the land will be recognized when you sell or otherwise dispose of it. The distribution decreases the adjusted basis of your partnership interest to $4K [$14K − ($8K + $2K)].However, Partnerships don’t pay FICA tax for their partners.So yuare not subject to FIC taxes to the IRS; Partners in the partnership must pay their own FICA taxes as well as their own income taxes. Some partnerships do run payroll on their own officers but the IRS doesn’t really care for this. It may come back to the haunt the officers at a later date.When partners take a draw, distribution or a guaranteed payment, they must take out a gross amount of say 1K from this, they must set aside 200-300 (depending on your personal situation) to pay their own estimated quarterlies. Partners in the partnership must submit their own 1040-ES to the IRS on a quarterly basis for their taxes. FICA and income tax is a different tax. When you send the IRS one chunk of cash, the IRS puts this in your account and the amounts that are figured out when you file your personal 1040. Remember the profits inside the partnership are subject to your income tax rate even if you did not bring those profits home with you.Guaranteed payments taken as “take home pay” is subject to both your income tax rate and to FICA taxes on Sch SE. Partnerships are similar to sole proprietorship because the partners have to pay the full 15.3% of social security/medicare tax. partners on their share of partnership income are considered self-employed for self-employment tax purposes.



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Old 01-06-2014, 12:16 PM
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I took another look at my K1 from 2012. By beginning capital account was 11k, ending was 26k. I was paid 35k in guaranteed payments and it shows 15k as ordinary income. I never received this 15k as a distribution, and I am certain that the 11k beginning balance was from ordinary income that was never distributed to me either. Did my capital account balance increase because I did not receive the distribution. As the company did not have the means to pay this when I left, wouldn't I have a loss of 25,900 since I "forfeited" this income that I paid tax on for $100 per the minutes?



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Old 01-07-2014, 12:30 PM
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Originally Posted by speedracer350 View Post



#1;I took another look at my K1 from 2012. By beginning capital account was 11k, ending was 26k. I was paid 35k in guaranteed payments and it shows 15k as ordinary income. I never received this 15k as a distribution, and I am certain that the 11k beginning balance was from ordinary income that was never distributed to me either.



#2;Did my capital account balance increase because I did not receive the distribution.



#3;As the company did not have the means to pay this when I left, wouldn't I have a loss of 25,900 since I "forfeited" this income that I paid tax on for $100 per the minutes?
#1;correct;$15k is $26k,end bal,-$11k,beg bal, For example, assume that Aand Bform a LLC. A and B will each have a 50% interest in the LLC. A contributes $100 and B contributes property with a basis of $50 and a fair market value of $100. Accordingly, A and B would each have a capital account balance of $100. If in year 1 the LLC generated $50 of profits, A and B’s capital account (equity in the LLC) would be increased to $125 respectively (A and B’s capital account is increased by the $25 of LLC profits they were allocated). In year 2, if the LLC generated a $20 loss, A and B’s capital account would be reduced by $10 respectively bringing their capital account (equity in the LLC) to $115 respectively.
NOTE; Beginning Capital Account Balance:
+ Additional cash and property (at fair market value) contributed by member
+ Allocations of LLC income or gain
+ Allocations of LLC tax exempt income
- Cash distributed to the member
- Fair market value of property distributed to member net of liabilities secured by the property
- Allocations of nondeductible LLC expenses
- Allocations of LLC losses and deductions
= Book Capital Account Balance at the End of the Year



#2;correct; distributions decrease your cap acct. The total members’ equity in the LLC is expressed as the “capital accounts” of the members. Each member of a LLC has a separate capital account that represents the equity that member has in the LLC. Capital accounts in LLCs track each member's initial contributions to the LLC in terms of capital. Capital accounts are also used to track additional capital contributions made by members. Contributions made to capital accounts can be in the form of money or other assets. Members contribute property or equipment as a form of capital. When this occurs, all members must agree on a fair market value of the asset. That amount is placed in that member's capital account. Profits and losses are also reflected in each member's capital account. Profits and losses of an LLC are divided in terms of ownership percentage. This information is described in the LLCs operating agreement. So, A member’s share of equity is the amount he/she would receive if the LLC was liquidated and all of the assets were sold at their book value, all liabilities paid, and the net proceeds distributed. As the LLC carries on the trade or business, these capital accounts will change depending on how the members agree to share in the net profits and net losses of the LLC.



#3;Correct;owever, it depends. MMLLC Act allows claimants to sue a dissolved LLC, but only “to the extent of its undistributed assets; The tax treatment of a distribution to both the MMLLC and its members depends on the type of distribution made. Distributions are current or liquidating and either proportionate or disproportionate. Gains but not losses may be recognized by a member in a current proportionate distribution. Gains and losses may be recognized by a member in a liquidating proportionate distribution. In a disproportionate distribution, both members and the MMLLC may recognize gains and
losses.; many feel MMLLC profits should be based on percentage of member shares, but that’s not always the case. The true distribution method should be spelled out in the operating agreement. An MMLLC with more than one member is by default treated as a partnership, and any profits the company realizes is reported on each member's individual tax return. The proportion of profits distributed to each member is determined by agreement between the members. For instance, if all members put in the same amount of funds to start the LLC, but one member does most of the work in running the company, the members can decide to give that person a disproportionate distribution of the profits to compensate for his efforts. As with many things, the question of whether you should take a distribution from your company is not a matter of can you do it, but should you. In fact, there are two ways a biz can have a negative financial status. It can be at a negative position on the books as a result of applying paper losses to revenue. Paper losses include things such as depreciation that are not out-of-pocket expenses and are applied to revenue for tax purposes. Alternatively, the corporation can have negative cash flow that reflects an inadequate amount of cash-on-hand or liquidity to cover monthly expenses. Any time an S corporation shareholder pulls money out of the business that is not salary, a loan or the repayment of a loan, it is classified as a distribution. The company can make a distribution at any time, as long as there is cash available. Whether it is prudent to do so if the company is faced with some sort of negative financial position depends on the circumstances. If the company has a positive cash flow with adequate funds to pay monthly bills but a negative position on the books due to paper losses, a distribution will have little impact. If the company has a negative operating position, without enough money to pay bills, and you take a distribution instead of paying creditors, you will endanger the company's legal standing. Any time a biz shareholder /memer/partner pulls money out of the business that is not salary, a loan or the repayment of a loan, it is classified as a distribution. The company can make a distribution at any time, as long as there is cash available. Whether it is prudent to do so if the company is faced with some sort of negative financial position depends on the circumstances. If the company has a positive cash flow with adequate funds to pay monthly bills but a negative position on the books due to paper losses, a distribution will have little impact. If the company has a negative operating position, without enough money to pay bills, and you take a distribution instead of paying creditors, you will endanger the company's legal standing. If the company is currently cash poor, the best option’d be to distribute the shares to the participant.
Note; The lack of distributable funds is a problem with operating a business through an LLC treated as a partnership for tax purposes. If you put cash into the LLC, you would debit cash in the bank and credit the corresponding partner's capital account. The capital accounts are part of the equity section of the partnership's books. With respect to the foregone distributions, you have a couple of options.
1. Pass on entering this in the books and keep a separate record of the amounts due to each partner
2. Create a payable (liability or credit entry) for the amounts due and debit the corresponding partner's capital as a distribution .



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