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LLC CPA discusses Partnership Mergers | Form 1065

LLC CPA discusses partnership merger for Form 1065

Gary Bode, CPA: structure your LLC merger correctly and it's non-taxable. (910) 399-2705.

Two types of Partnership mergers exist, nicknamed “assets over” and “assets up.” The IRS default is the assets over type, so I’ll define that here with a simple example. I think most LLC CPAs deal with this issue.

Assets Over type of Partnership Merger

Here, a target partnership (AB LLC) transfers all of its assets to an acquiring partnership (XY LLC) in exchange for a partnership interest of the acquiring partnership. AB LLC then dissolves.

Any Tax Consequences?

A true asset over type of partnership merger is non-taxable. The tax basis of each partner changes, of course.

An example of the Assets Over type of Partnership Merger

AB LLC merges with XY LLC by transferring its assets to XY LLC in exchange for 40% interest in XY LLC, renamed ABXY LLC for this example. AB LLC dissolves and files a short year, final Form 1065. ABXY LLC files using the same tax year as XY LLC.

Let’s look at how Partner A and Partner B’s tax basis changes because of the merger. Their tax basis in AB LLC was each $10,000. AB LLC’s assets had a basis of $60,000 and a Fair Market Value of $200,000 at the time of the merger. And AB LLC had $40,000 of liabilities. XY LLC had $240,000 FMV of assets with no liabilities.

  • Partners A and B each own 20% of ABXY LLC (40% /2).
  • Partners A and B’s tax basis in AB LLC debt, transferred to ABXY LLC, was each $20,000 (40/2).
  • Partners A and B’s tax basis in ABXY LLC debt is now each $8,000 (20% x 40,000).
  • Partners A and B’s tax basis in ABXY LLC is now each $18,000 [(60/2)-20+8].

I’m a Form 1065 LLC CPA with a virtual office to accommodate long distance clients beyond my Wilmington, NC locale. If you don’t have a local Form 1065 CPA, consider calling for a free phone consult at (910) 399-2705.

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