LLC Member Terminating Her Interest

[David]

LLC member terminated her interest as of 12/31/15. 

The equity section of the balance sheet shows the following for her:

$8K Investment

(43)K Draws

Her allocated portion of Retained Earnings is $33K, which doesn't offset the negative $35K Investment and Draws. She was paid $50. 

My understanding is that the $50 should be reported as a distribution to her and she determines how to report her gain or loss on her personal tax return. Is this correct?

Also, how does the liquidating interest get reported in the company's QB? Does her Investment and Draws balance get flushed to Retained Earnings? 

Thanks.

 

 

[David]

To be clearer on my previous post - the net equity for the departing member is negative. Does this net negative equity get flushed to Retained Earnings?

I just found out from the client that the $50 payout to the exiting LLC member wasn't paid until 2016. Since the company reports cash basis for tax I guess this won't be the LLC member's final K-1. The 2016 K-1 will show no income but only the distribution. 

I guess it will be up to the departing member to calculate he gain/loss on her tax return for 2015 and then report a $50 gain in 2016?

Thanks.

[BHoffman]

Is this a partnership, or did the company make some other election?  

Who bought her interest for $50?

She will figure the gain (loss) on her 1040.

If it is a 1065 partnership and there are "hot" assets, then there is some more work to do.

[David]

The LLC is taxed as a partnership and the company paid her the $50. The company is taxed on cash basis accounting, so no inventory or receivables are reported on the tax return balance sheet. Therefore, there aren't any "hot" assets involved and Form 8308 doesn't need to be filed - correct?

Is the exiting LLC member's negative equity balance (draws) just transferred to Retained Earnings?

Thanks.

[BHoffman]

Here is a link to an article I like regarding hot assets and Section 751 and cash basis partnerships:

http://www.forbes.com/sites/anthonynitti/2014/05/27/tax-geek-tuesday-hot-assets-and-the-sale-of-partnership-interests/#61444c827f98

[BHoffman]

Here is a much better article, and it talks about redemptions:  http://www.forbes.com/sites/anthonynitti/2015/06/16/tax-geek-tuesday-comparing-a-sale-and-redemption-of-a-partnership-interest/#73e114072cfc

 

[David]

Thanks so much for the articles. I haven't read through all of it yet but hopefully it will address all my questions, especially regarding filing Form 8308 and how to record the negative equity related to the departing member.

Thanks.