1065

[JG EA]

For one final 1065 I was trying to figure out how to account for a liquidating distribution of money with no basis for any of the partners. I was trying to figure out how to have the bottom line with enough income to give them basis. They had taken the profit and allocated it to the partners in different amounts based on what the partners did therefore it was guaranteed payments.

But by doing so, the capital account ended up with more than zero which really confused me on how to get it to zero and still allow for this basis question.

Finally I concluded that maybe there's a reason that the preparer of the partnership return isn't responsible for figuring basis. So, I left the bottom line at zero and put all the profit into guaranteed payments (because a different amont went to each partner) and stopped worrying about the fact that they will have a capital gain on the distribution.

Any thoughts?

[outwest]

You are correct, in addition..

if you step back and look at the overall picture, creating enough income to match the liquidating distribution could have the effect of converting capital gains to ordinary income.

The numbers are what they are, and a capital gain on distributions in excess of basis is not too bad a result.

Doug

[JG EA]

Thanks

Thank you for your reply. I can get tangled up in these things.

It's the same with the AAA on S-Corps, I have the hardest time sorting it out if it is not simple. I finally read the instructions for that more carefully and unless there is not some reason like C-Corp in the past, you don't have to fill it out. But, the software put numbers in there making me think they had to be there.

[outwest]

Love the AAA also but

it is something that is needed on most S Corp returns. I always have to go through the worksheet step by step because I can't remember the ordering rules.

Two most common errors on the AAA: Thinking that AAA will always match the retained earnings. Not so, the AAA addresses a subset of the retained earnings.

Second, the pretaxed earnings column which is only applicable if there are prior C Corp earnings before the S election. I think this is what you were referring to. Even if this column is blank, the AAA column may be required.

For what it's worth.

Doug

[JG EA]

If I might further ask..

it is something that is needed on most S Corp returns.

But it does say it is "recommended" in the instructions - not required. Why is it something that is needed on most?

... Not so, the AAA addresses a subset of the retained earnings.

What does subset of retained earnings mean?

For what it's worth.

A great deal and thank you again.

[outwest]

My take has been.

>>But it does say it is "recommended" in the instructions - not required. Why is it something that is needed on most?

Seems like the sooner or later, some event happens that needs the AAA account. So my attitude is that it's better to track it all along. It's "recommended" up to the day it's "required" then it may be tricky to reconstruct. Kind of the same thing with shareholder basis.

The subset comment reflects that AAA is just one part of retained earnings. C Corp E&P would be another. Nontaxable income would affect retained earnings but not AAA. I think there are other examples that I don't recall just now.

Doug

[rosieea]

The subset comment reflects that AAA is just one part of retained earnings. C Corp E&P would be another. Nontaxable income would affect retained earnings but not AAA. I think there are other examples that I don't recall just now.

Doug

Another example is that distributions cannot take AAA below zero, but retained earnings would be reduced by the entire amount.

[JG EA]

Thanks outwest and rosieea.

I will use this information this year.