Partnership

[oceanlovin'ea]

Here I go with my partnership again. Clients bought restaurant (just business, not building) on 6/01 for $48,000. Paid seller $40,000 and will make payments of $344 for 24 months to him. The purchase price was as follows:

Equipment - 32019
Furniture & fixtures -246
Goodwill 13000
deposit that stayed with business - 515.
Misc supplies (considered inventory) - 2220

All debits

Credited each partner with 20,000
Notes Payable of 8000.

I'm pretty sure my entries are correct. If not, please tell me. But I was just thinking that even though they are paying 48,000 for the restaurant only 40,000 is actually showing as equity. If and when they sell this business, will their basis ever show that additional 8,000 they paid? (Hope this doesn't sound like a stupid question, but I was just trying to think ahead. Maybe at this stage of tax season, we shouldn't do that)

Linda F

[Bees Knees]

Their basis already contains the $8,000 additional amount that will be paid. Partnership liabilities increase basis for the partners. Total basis in the partnership at the time of purchase is the $20,000 capital account plus $8,000 liabilities.

This is a good example of why a partner's capital account does not equal basis.

[oceanlovin'ea]

Thanks

Bees Knees. I knew there was an explanation. I just needed to hear it. That emphasizes the need to keep track of each partner's basis.

Linda F

[Bees Knees]

To throw a twist into this scenario, if the partnership was an LLC, the LLC members would not get basis for the $8,000 debt, unless they personally guarantee the debt. That would sort of be like the S corporation basis rules, except that personal guarantees work for LLCs, but not for S corporations.

Having said that, for every LLC I have ever done, loan agreements have always required the LLC members to personally guarantee the debt because banks generally like the owners to co-sign the loan. Thus, you generally are not going to have a lack of basis issue in regards to LLC liabilities. Even payroll tax liabilities of an LLC, you could probably argue LLC members are personally liable for the trust fund taxes under the responsible person rules.

[Gretel]

Just for clarification: Only the member of the LLC, who guarantees the loan has basis, right?

I have an LLC, one member uses his personal credit card (can not get a company card right now because of bad credit, I will fight for this with the IRS), so he has all the basis from the debt, right?

[Bees Knees]

An LLC member who co-signs a loan or uses his personal credit card would have basis in the debt. You are right that not all LLC members would get basis for the debt if only one co-signed the loan.