1065

[Super Mom]

I'm still researching on this, but I wanted to glean the vast knowledge on this board. I have a partner with distributions in excess of the basis as best as I can figure it. But the distributions are not in excess of the capital account. So far, I'm understanding that the partner pays capital gains tax on the excess distribution is excess of BASIS, am I going the right direction on this?

[Super Mom]

When using the alternate method of assets as if the business were liquidated, the excess distributions aren't as much that way. But if I follow the basis through year to year it's a larger amount, is that the right way?

[Super Mom]

I haven't got any responses yet, is this a stupid question? Please forgive me if it is. I'm still learning on 1065's so help is very much appreciated!

[Koss]

Partnership Distributions

Not a stupid question at all. I don't do a lot of 1065s either, and they can get really complicated really fast.

I purchased the CPE course called Small Business Tax Review, and it covers this topic. I'm definitely going to earn the 8 hours of CPE credit. I probably won't try to take the exam until some time in June.

Here's what the book says:

Tax effects of distributions on partners. A partner pays tax on income at the time the income is earned, not when the income is distributed. Therefore, distributions to partners are generally not taxable. Exception: A distribution of money is taxable if the amount of the distribution exceeds the partner's adjusted basis in the partnership interest.

It also says:

Gain. Gain will not be recognized by a partner in a current distribution unless money is distributed. Gain is recognized only if the amount of money received exceeds the partner's adjusted basis in the partnership.

So, yes, you're on the right track. But be aware that distributions of property are treated very differently from distributions of money.

You mentioned "using the alternate method of assets as if the business were liquidated." There's definitely a difference in the tax treatment. A distribution is either a current distribution or a liquidating distribution. But it's not about liquidating the business. Rather, it's about liquidating the partner's interest.

The interest of one partner can be liquidated without liquidating the entire partnership.

Hope this helps.

BMK

[Super Mom]

It does, thank you, I have to get CPE courses too, and will check on that one!!!! Thanks for your time!!!!!

[Super Mom]

OK, I've researched and came to the conclusion that this partner must take a gain for the distributions exceeding basis. My question now is how to report it? I didn't see a good place on Sched. D, not really a dividend, but must do that way?????

[Koss]

Schedule D

Schedule D, line 5 or line 12

BMK

[Koss]

Wait a minute...

My answer was for reporting the gain on the partner's Form 1040.

Are you doing the partner's Form 1040, or are you preparing the 1065?

BMK

[Super Mom]

Both, thanks! I know it goes on the 1040

[oceanlovin'ea]

Burton, Where did you get the CPE course on Small Business Tax Review? I think I would like to take that one too.



Linda, EA

[Koss]

Reporting of Gain

I think you have reached the correct conclusion that the partner needs to report the gain (the amount of the distribution that exceeds his adjusted basis) on his individual tax return. And as I noted in the previous post, I think it belongs on Schedule D, either on line 5 or line 12.

But on the Form 1065, and on the partner's Schedule K-1, I don't think you need to report the taxable gain at all. You simply report the partner's gross distribution on line 19 of Schedule K-1.

It is the partner's responsibility (or perhaps your responsibility, since you are preparing his 1040) to determine what portion of the distribution on line 19 of the K-1 is taxable, and then to report it on the applicable line of his return, which in this case is either line 5 or line 12 of his Schedule D.

I don't think the taxable portion of the distribution gets reported anywhere on the 1065, or on the Schedule K-1. On the partnership return, and on the K-1, you only report the gross distribution.

BMK

[Koss]

Small Business Course

Right here at TTB

http://www.thetaxbook.com/thetaxreview_series.asp

Last year, I purchased the Individual Tax Review and the New Tax Law Review.

This year, I purchased Clients with Children, Small Business Tax Review, and IRS Rules for Ethics.

I've been pleased with every one of them.

BMK

[Super Mom]

Got that, thanks!