Gary Bode, CPA: Property distributions to Partners can produce unintended IRS Form 1065 tax consequences
Partnership property distributions to Partners deserve proactive consideration to avoid unintended tax consequences upon IRS Form 1065 and NC D403 tax preparation. While the IRS rules are straightforward, application becomes complex as cash and multiple properties become involved.
“Restructuring a prior year Partnership property distribution for IRS Form 1065 and NC D403 tax preparation may not be possible. Better to proactively consider the the tax consequences.”
Gary Bode, CPA and tax accountant
An Example: Partnership distribution triggering capital gain from reduced Partner liability
Partner Andrea receives a $35,000 cash distribution from Wilmington NC CPA Firm, an LLC partnership, in exchange for reducing her percentage in capital, profit and liabilities from 25% to 15%. Her IRS Form 1065 tax basis is $30,000. So the first $30,000 of the distribution is tax free and reduces Andrea’s basis to zero. The additional $5,000 is taxed to her as capital gain. Easy enough. But Wilmington NC CPA Firm has liabilities of $100,000. Partner Andrea’s share of that liability is reduced from $25,000 to $15,000, reflecting her decreased percentage of partnership liabilities from 25% to 15%. This $10,000 reduction is treated as a cash distribution for IRS Form 1065 tax preparation and then taxed as capital gain on Andrea’s personal IRS Form 1040. So her total cash distribution from Wilmington NC CPA Firm is $45,000, the $35,000 cash and the $10,000 of reduced liability. Ouch! And $15,000 [$5,000 + $10,000], not just the original $5,000, is taxed to her as capital gains.
If you need a free initial consult on a Partnership issue, please call us at (910) 399-2705.
And it is not just Partnerships that can have equity transaction surprises upon tax preparation. IRS Form 1120 and Form 1120S tax preparation is just as complex. In general, it pays to proactively consider the tax consequences of any equity transaction.
