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Partner with negative balance in a liquidation

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    Partner with negative balance in a liquidation

    Assume a partnership liquidates and one of the 3 partners has a negative capital balance. My understanding is that partner should restore the negative capital balance according to the partnership regulations. If anyone has experience with restoration of negative capital balances in a liquidations can you please share your thoughts as to how you restored the negative capital balance (contributions, special allocations, etc).

    #2
    If this isn't addressed in the partnership (or operating if LLC) agreement, then the final K-1 will show the negative balance and the deficit partner will typically report that as a capital gain on his/her Sch D in his/her form 1040 with zero cost basis. This is simplified advice, and there may be other considerations.

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      #3
      Partner with negative capital balance

      I have a similar situation, in that the partnership is now a "technical termination" for 2017, and one partner has a positive capital ending balance, and the other has a negative capital ending balance. There is a loss to report on the k-1 for both partners and from what I'm reading, the negative capital ending partner needs to report this negative on his Sch D. But can this also be reported as S/E income, to have him pay into his social/medicare? He is asking as he is trying to play catch up for his retirement, and would rather pay into s/e? Not sure if this is possible. Thank you!

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        #4
        No, it's not possible. Capital gain income and self employment income are two different things.

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          #5
          The only other thing I can think of is whether or not the partner can receive a guaranteed payment from the partnership before it's liquidated. There would be some real pencil pushing to figure that out.

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            #6
            Check agreement

            You probably should not assign any further loss to the member with a negative balance. You also may have to require the negative member to contribute. If there is a disposition on liquidation of cash or assets you may not have to distribute any to the negative member.

            Do you give the members 1099-DIVs for liquidating dividends. I think you do.

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              #7
              Technical Termination

              I wish to clarify my question, as I realized I may not have added all the information. The partnership question is that the partnership is filing for Technical Termination, as one partner (10%) is leaving, and the first partner (90%) is remaining, and taking on a new partner, where as his % is decreasing down to 25%, and the new partner is coming in at 75%.

              As this is a technical termination, and the first partner has a negative ending capital balance, is this the final k-1 for him, and then the new partnership would start up with a new beginning capital amount, or does the negative balance carryforward to his his partnership?

              I have been trying to find everything I can to answer this, and it's not clear for me. Thank you.

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                #8
                Originally posted by mario100 View Post
                I wish to clarify my question, as I realized I may not have added all the information. The partnership question is that the partnership is filing for Technical Termination, as one partner (10%) is leaving, and the first partner (90%) is remaining, and taking on a new partner, where as his % is decreasing down to 25%, and the new partner is coming in at 75%.

                As this is a technical termination, and the first partner has a negative ending capital balance, is this the final k-1 for him, and then the new partnership would start up with a new beginning capital amount, or does the negative balance carryforward to his his partnership?

                I have been trying to find everything I can to answer this, and it's not clear for me. Thank you.

                Yes, the partner with 10% that is leaving would receive a final K-1, and the partnership will file 2 short-period returns. The first short year ends when there is more than a change of 50% of the ownership, also presuming this is simultaneous with the 10% partner leaving, and then the new period will begin and continue for the remainder of the partnership's year.

                Maybe this linked article will get you moving in the right direction with this. It mentions the elections that should be considered and suggests how to report the ending balance sheet and M-2 on the terminated partnership and the beginning balances on the "new" partnership. https://www.thetaxadviser.com/issues...-story-10.html
                jklcpa

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                  #9
                  JudyL:

                  Thank you for your reply and the link. It really helped me with what I knew and added to what I needed to know. I was along the right lines, but not completely clear. This linked explained a lot, and truly appreciate it.

                  Thank you!

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