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Discussion Forum Index --> Tax Questions --> Partner Buy-in from sole prop/deprec. assets basis
{{ForumNewPost|UserID=Susan77|Date=10 April 2006|Text=My client was a sole proprietor for 6 years. Jan 1, 2005, he and a partner formed an LLC. My client contributed the existing depreciable assets which, because of Sec. 179, have a tax basis lower than the related liability (also assumed by the LLC). His partner paid $120,000 to my client for goodwill.
Questions:
1. Because sole proprietor's tax basis in assets contributed is less than liability, does he have a taxable gain? If so, is it ordinary or capital?
2. The $120,000 paid to sole proprietor for goodwill was basically considered the new partner's contribution to the LLC. How would I record that? goodwill on the LLC and $120,000 to new partner's capital account? Then would both partner's get the tax benefit of amortizing the $120,000?
3. $120,000 paid to sole proprietor: Would that be a $120,000 capital gain for my client?
Thank you for your help.
Dennis (talk|edits) said:
| 10 April 2006
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| If I were awake I would elaborate, but briefly...no.
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Susan77 (talk|edits) said:
| 10 April 2006
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| I'm Stuck! Well, I'm not sure what happened to the questions, but here goes again:
My client, a sole proprietor for 6 years, formed an LLC with a partner. S.P. contributes to LLC assets witha tax basis lower than the related liability (due to Sec. 179). Question 1: Does he have a taxable gain? If so, ordinary or capital?
Question 2: New partner paid $120,000 to S.P. to buy-in to LLC. Would that be Goodwill on LLC and $120,000 to that partner's capital? Then, would both partners get the benefit of the amortization deduction? Question 3: S.P. took the $120,000 personally. Would that be a $120,000 capital gain on his 1040?
Please respond to any or all question. I've gone in circles with my thinking. Thanks!
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Dennis (talk|edits) said:
| 10 April 2006
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| Client has apparently sold 1/2 of good will for $120,000. New partner is contributing that 1/2, basis $120,000; client is contributing 1/2, basis 0. Related liability is apparently non-recourse. I think you have to get the opening entries right and go from there. I might have new partner amortize good will directly on his own 1040. I think I would treat the asset liability as basis increase to new partner and distribution to your client as the loan is repaid.
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Susan77 (talk|edits) said:
| 10 April 2006
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| Okay, I can follow that. Thank you. Then, if new partner amortizes goodwill directly on his own 1040, would I still show the amortization on the 1065, but allocate it 100% to new partner's K-1?
The related liability is actually recourse. Your question was helpful; so I guess sole-proprietor does have basis.
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Dennis (talk|edits) said:
| 10 April 2006
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| I get an opening balance sheet with 0 assets, loan payable, 1 partner with negative capital in the amount of the loan and the other partner with 0 capital. Strange, but with income it will look better.
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Foxttron (talk|edits) said:
| 10 April 2006
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| If the new partners makes a sec 754 election, the books of the partnership will reflect the extra $120,000 in asset. The deduction is solely for the new partner, not for the original owner. You can do everything with your tax software, just be sure that the deduction will go the correct partner. Furthermore, I would not show, on the K1, the ownership as 50/50 but I would write "per agreement" because, with a 754 election, there is an amendment to the agreement.
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Susan77 (talk|edits) said:
| 10 April 2006
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| That's helpful. Thanks. Sole Prop. does have some basis in the depreciable assets; they are not 100% fully depreciated. I was planning on using the same depreciation schedule for the LLC; same cost; same prior depreciation; Does that sound correct?
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WillyB (talk|edits) said:
| 11 April 2006
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| Yes, basis and holding period attach for assets transfered into a partnership (or LLC).
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Susan77 (talk|edits) said:
| 11 April 2006
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| Do I need to attach the Sec. 754 election to the 1065?
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Foxttron (talk|edits) said:
| 11 April 2006
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| yes, you do. It is a simple statement with details.
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Susan77 (talk|edits) said:
| 8 June 2006
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| I'm back . . . seems the Sec. 754 election does not work, unless you can steer my thinking correctly. New partner paid cash for the goodwill ($120,000), so his basis in the goodwill and the FMV of the goodwill is the same -- doesn't seem to match the qualifications for Sec. 754. Any other ideas for amortizing the goodwill solely to new partner?
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Riley2 (talk|edits) said:
| 9 June 2006
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| Susan77, a 754 election may work for you, but not with a 743 adjustment. Instead, it may work with a 734 adjustment.
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Susan77 (talk|edits) said:
| 9 June 2006
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| Riley2, (or someone), can you elaborate a bit more?
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Dennis (talk|edits) said:
| 9 June 2006
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| Riley's suggestion would apparently involve partner 1 contributing 120,000 and partner 2 contributing good will FMV 240,000, basis 0.
Partner 2 gets the 120,000 and basis in goodwill is correspondingly increased by his gain under ยง734.
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Riley2 (talk|edits) said:
| 9 June 2006
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| If the partnership has a 754 election in effect, the gain resulting to the partner from distributions in excess of outside basis will result in a mandatory upward adjustment of the basis of partnership assets.
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Foxttron (talk|edits) said:
| 10 June 2006
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| Agreed, Susan, probably you need to create a schedule for the inside and outside basis of every partner. As you do that, you can match the asset to the appropriate partner and give him (or her) the appropriate amortization expense.
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Jmrmdcpa (talk|edits) said:
| 19 June 2006
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| From the facts, this sounds to me like a disguised sale of a 50% partnership interest since the SP took the cash personally.
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Susan77 (talk|edits) said:
| 20 June 2006
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| I'm also stuck on Sec. 704(c) Seems Parter 1 (who contributed $120,000 for goodwill) would be allocated 100% of the depreciation on the depreciable assets contributed by Partner 2. Debt related to the depreciable assets is $280,000. Tax basis on assets is $100,000. Help!
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Dennis (talk|edits) said:
| 20 June 2006
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| Partner 1 is contributing a negative $180,000. Partner 2 is contributing $120,000 (which partner 1 takes)and accepting $140,000 in debt (which partner 1 also takes). Looks like Partner 1 is recognizing $160,000 in income? 1 has opening basis of ($40,000) 2 $260,000. Any way you look at it, a 734 allocation is going to give you a distorted picture. I stand by my post of April 10.
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Susan77 (talk|edits) said:
| 20 June 2006
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| Partner 1 is still personally liable for 100% of the debt though -- so wouldn't that prevent him from recognizing income on the $40,000 debt relief?
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Cindy777 (talk|edits) said:
| 27 September 2006
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| WillyB
Do you know if you can take Sec. 179 on assets contributed to to a partnership by one partner who has a 1/3 interest in the partnership?
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