Discussion:Need help closing partnership books

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Www.cpa1.biz (talk|edits) said:

13 February 2007
Almanacers,

I am closing partner's books for last year. Balance sheet will show zero for everything of course. Partner 1 has positive capital account for $998 and Partner 2 has negative account for -$582. There is $416 in cash.

Disregarding anything else, how do I show this closing entry on the K-1 part N for partner with netagive capital account? Do I just show a contribution of $582 to make the balance zero or do I do nothing at all and just show the -582 and and show the distribution of $416 in cash to partner 1 lowering his positive capital account to $582 making both accounts clear to zero?

Please advise.

Www.cpa1.biz (talk|edits) said:

13 February 2007
This is a final return

Glmpllc (talk|edits) said:

13 February 2007
Ditsributions should follow p'ship agreement. Read the agreement, specifically the provisions on liquidation. You have to know if the capital account you are looking at is GAAP, tax, 704(b) book, or some other. Part N on K-1 may not be reporting 704(b) book which is generally the basis upon which it is liquidated.

If all is right and you still have this discrepancy, you need to know if Partner 2 has to make up his negative capital account...it'll be in the partnership agreement.

If you still think all is right and you are just uncomfortable with the capital accounts being slightly out of whack, then see if there is a qualified income offset which will allow you to allocate to partner 2 $542 of income.

good luck...it can be a pain because now you have to make right all prior year allocation mistakes that happen.

Kevinh5 (talk|edits) said:

13 February 2007
sometimes the agreement will say that the negative capital account must be made whole by that partner. Oops, you just said that.

Jf-okla (talk|edits) said:

14 February 2007
Generally, a partner with a negative capital account must bring it to $0 when the partnership winds up.

Www.cpa1.biz (talk|edits) said:

14 February 2007
Sounds interesting. And if they dont, I guess the other partner's take the loss. I mean all there is left is cash but less cash than the other partner's cap account which is also his basis.

Should I show a capital loss for the difference on schedule D?

Deback (talk|edits) said:

February 14, 2007
No capital loss to show. Partner #1 keeps the cash, and partner #2 owes #1 the difference. You are just distributing the cash asset.

Glmpllc (talk|edits) said:

14 February 2007
check for a qualified income offset

FTF65 (talk|edits) said:

February 14, 2007
The reason that this situation exists is because either your cash distributions and/or P&L allocations (for prior year or current year) are out of whack. In order to help you resolve this situation, it would be helpful to know the following:
  1. Is this an LLC, LP or general partnership?
  2. If an LP or general partnership - is Partner 2 a general partner?
  3. What is the amount of income or loss in 2006?
  4. What caused Partner 2's capital to go negative - distributions or loss allocations?
  5. Was Partner 2's capital account negative at the end of 2005?

Www.cpa1.biz (talk|edits) said:

14 February 2007
1) LLC

2) both general partners 3) income was $24 SHORT YEAR 4) Excess distrobutions caused the partner to show negative amount 5) Partner's 2 capital accounts was negative at the end of 2005

Partner 2 has a negative capital account and a 0 basis at end of 2006. Parnter 1 has the positive capital account and a positive basis

This is going to be a complete liquidation of the company. Only the cash is being distributed...

FTF65 (talk|edits) said:

February 14, 2007
Because this is an LLC, I doubt that there is any requirement that Partner 2 restore his deficit capital account (note: if partner 2 had a deficit restoration obligation, this would be in the operating agreement - as GLMP said, check the liquidation provisions; however, since this is an LLC, I'm guesssing that if it says anything, it will say that no member is required to restore a deficit capital account).

Two additional questions: (i) was there any debt in the partnership in 2005 or 2006? (ii) what was the amount of gross receipts in 2006?

Www.cpa1.biz (talk|edits) said:

14 February 2007
1) No debt in company

2) Gross receipts 6,300

Thanks. Nothing in agreement that talking about paying back deficit..

FTF65 (talk|edits) said:

February 14, 2007
Since there is no debt in the company, it sounds like Partner 2 should have had a Sec. 731 gain in the year that he received the distribution - basis can never be negative.

In the "regulatory" allocations section of the operating agreement (probably immediately after the P&L allocation section), you should see (as GLMP noted) a section referring to "qualified income offset" and you may also see a section discussing "curative" allocations. These sections require you to specially allocate $582 of gross income to Partner 2 in order to zero out his capital account (note: if Partner 2 did recognize 731 gain in the prior year, his basis in the partnership will already be zero; accordingly, this gross income allocation will create $582 of basis that will trigger a loss on liquidation which will directly offset the income hit).

The shift of this income to Partner 2, will result in a $558 loss that will get specially allocated to Partner 1 - the loss should result in a Partner 1 ending capital account of $416. Distribute cash to Partner 1 in liquidation.

Www.cpa1.biz (talk|edits) said:

14 February 2007
Ok,

This looks good. Thanks for the help. What sources do you all use for guidance, PPC, CCH...Etc...

Thanks again.

Bj

Glmpllc (talk|edits) said:

14 February 2007
www....for this kind of stuff, it's experience and having had the benefit of good mentors in the past.

good luck

JIlls201 (talk|edits) said:

29 March 2007
I have same issue: closing partnership, several partners having negative balances. However, the final year of the partnership had NO income, just a long-term capital loss. Since there is no positive income to allocate, do I just record each partner as giving a capital contribution in the amount of his/her negative balance to bring the accounts to zero?

Kevinh5 (talk|edits) said:

29 March 2007
no, you should actually have the partnership collect the cash, then distribute out in proportion to ownership

Taxworld2 (talk|edits) said:

24 March 2009
What if the only two partners both have negative balances. This partnership defaulted on the debt and bank has not contacted the partners two years later. The bank has it's own set of problems. The partners are insolvent and have filed for bankruptcy. It seems wrong to credit a capital contribution. This return has a one number on it, a negative partner capital account split 50/50. How do I report to finalize?

Thanks,

TW

Waynecpa (talk|edits) said:

11 September 2009
Partnership closes with both partners having negative balances. One partner pays the other $30,000 in order to keep the business and depreciated assets. How should this payment be treated? Capital gain to the receiving partner and goodwill paid on the paying partner's schedule C?

Blrgcpa (talk|edits) said:

13 September 2009
Goodwill is an asset and doesn't get reported on a sched c. Sounds like the purchase of assets which passed outside the business.

CrowJD (talk|edits) said:

13 September 2009
Go ahead and close them. This book must be huge. How long have they been in business?

If you need help, holler out the window, or try to find a strong teenager to help you close the book, if you can get them away from that Web.

Also, I don't like these words, "This is a final return." That sends chills up my spine. It's something like Poe would write: This is a f i n a l return. Ugh, brrrrr.

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