To join in on this discussion, you must first log in.

Discussion:Partnership complexity- I think

From TaxAlmanac, A Free Online Resource for Tax Professionals
Note: You are using this website at your own risk, subject to our Disclaimer and Website Use and Contribution Terms.

From TaxAlmanac

Jump to: navigation, search

Discussion Forum Index --> Advanced Tax Questions --> Partnership complexity- I think


Discussion Forum Index --> Tax Questions --> Partnership complexity- I think

Southparkcpa (talk|edits) said:

5 March 2014
2 different partnerships, same partners, identical business models different parts of the state. One failed, the other is fine. They both started with 200K bank loans guaranteed by partners individually. Partnership A (failing biz) has a loan payable of 200K and negative equity of 200K and we will close this and file a final.

Partnership B is in OK shape and will PAY the loan from partnership A. I am troubled with the transfer. To handle this loan transfer I initially thought as follows:

OPTION 1

Partnership A - Initial thought was NO COD income at partnership A due to common ownership. Simply debit loan, credit equity. File final 1065.

Partnership B - Credit Loan Payable- Debit Equity. That seems wrong.


OPTION 2

Perhaps I should record income at A , dr Loan, credit income. Then at B have “goodwill” on the books? Dr Goodwill Credit Loan.

That seems wrong as well as no equipment changed hands. As I write this, Option 2 looks to be correct.

Any thoughts out there?

Ckenefick (talk|edits) said:

5 March 2014
How could there be COD if there's no C?

Terry Oraha (talk|edits) said:

5 March 2014
I like option 1. debit equity that's right.

Imagine you are doing a partnership merger. Partnership A had a negative 200k equity just layer it on.

You can't have COD, like Chris said, without C you only have OD.

Southparkcpa (talk|edits) said:

5 March 2014
The loan was "taken over" by a guarantor, i.e. the partners. They then transfer that loan to their other partnership. But I am getting clarity as I write this. My initial reaction was NO COD as debt was distributed to the partners as guarantors. But then when the loan is put on books at Partnership B, we debit Equity? Would have to it seems.

Ckenefick (talk|edits) said:

5 March 2014
You gotta think about what transpired here. The negative $200k of equity involves $200k of losses or $200k of distributions or some combination thereof. So, they guys, via Loser Partnership (LP) have already reaped $200k worth of tax benefits (deductions and/or tax-free cash distributions). They basically get to keep these benefits if they make good on the loan.

The journal entry you describe is neutral from a basis standpoint: $200k negative capital and $200k debt. The fiction is that Good Partnership borrowed $200k from the bank on a new loan (if you will), immediately distributed the proceeds out to the members, who then contributed the proceeds to Loser...then Loser paid off the old loan (if you will).

Southparkcpa (talk|edits) said:

5 March 2014
No question.. my trouble comes from them tranferring UP the loan to the 2nd partnership. As terry states, if we think of this as a merger, no tax ramification. I'm leaning toward NO TAX consequence and as 2nd partnership makes income to pay loan, it is taxable.

Kevinh5 (talk|edits) said:

5 March 2014
If the entire 200K isn't swapped for equity, then each principal payment on the debt is a distribution to the 2 partners.

Ckenefick (talk|edits) said:

5 March 2014
I'm leaning toward NO TAX consequence and as 2nd partnership makes income to pay loan, it is taxable.

Not sure what that means. If you make income, you pay tax on it anyway.

I'm with Kevin too. If you just keep the loan out of Good Partnership, distributions will be made to personally pay off the loan.

Southparkcpa (talk|edits) said:

5 March 2014
Interesting. Ill think it through. You guys are the best!

To join in on this discussion, you must first log in.
Personal tools