Partner Basis Below Zero

[Edsel]

At first glance, you say this "can't happen", as any losses below zero must be suspended until such time as basis can be restored to allow a loss.

However, what if a partnership is dissolved, and a partner receives more cash than his basis.  Example:  Basis is $11,000 and Cash Received upon Dissolution is $17,000.

I believe there is a $6000 capital gain, but I don't know the logistics of how to report it.  8949?  Sch D?  Proceeds of $17,000 and basis of $11,000???

[Edsel]

 

9 hours ago, Edsel said:

I believe there is a $6000 capital gain, but I don't know the logistics of how to report it.  8949?  Sch D?  Proceeds of $17,000 and basis of $11,000???

More logistics.  On Sch K-1, there is a calculation of basis in Section L.

For the above, should the calculation show going into the negative by $6000?  (This can only happen upon dissolution)  Or should the distributions be lowered such that the basis does not go below zero?  Either way, the taxpayer still has to report a capital gain.

[Abby Normal]

Quite simply, basis can never be below zero. Cash received in excess of basis is a capital gain, just like any other investment. (Sch D/8949) The capital gain is not on the K1, just the partners 1040.

On the final K1, just have an other adjustment to zero the capital accounts. Capital accounts and basis are not the same thing and almost never match in partnerships.

Section L is the capital account, not basis.

[Edsel]

1 hour ago, Abby Normal said:

On the final K1, just have an other adjustment to zero the capital accounts.

Abnormal, Thanks.  But easier said than done in Drake.  The other available elements there involve s. 754 and hot assets.  Adding basis to avoid the negative basis also gives the preparer the notion that the taxpayer zeroes out and avoids having to report a capital gain.

[Abby Normal]

It's so easy in ATX!

And you're not adding basis, you're "adding" capital.

 

[Abby Normal]

Read your user manual:

https://www.drakesoftware.com/sharedassets/manuals/2017/partnerships.pdf

[Abby Normal]

Or call that vaunted support Drake supposedly has. Or is it ballyhooed?

[jklcpa]

1 hour ago, Abby Normal said:

Read your user manual:

https://www.drakesoftware.com/sharedassets/manuals/2017/partnerships.pdf

 

1 hour ago, Abby Normal said:

Or call that vaunted support Drake supposedly has. Or is it ballyhooed?

 

Calling any vendors' technical support is only for program help, and it is unrealistic, unreasonable, and unprofessional to expect those working in support to provide tax preparation guidance on how to report particular transactions.  Once the preparer knows how and where items should appear on the return and either 1) can't figure out where to enter, or 2) if making valid input entries and the program is not working properly, only then is it appropriate to call technical support.   Obviously, other calls to support or programming for other program issues such as installation, updating, and programming errors are also appropriate.

[jklcpa]

15 hours ago, Edsel said:

At first glance, you say this "can't happen", as any losses below zero must be suspended until such time as basis can be restored to allow a loss.

However, what if a partnership is dissolved, and a partner receives more cash than his basis.  Example:  Basis is $11,000 and Cash Received upon Dissolution is $17,000.

I believe there is a $6000 capital gain, but I don't know the logistics of how to report it.  8949?  Sch D?  Proceeds of $17,000 and basis of $11,000???

Maybe or maybe not capital gain.

 

2 hours ago, Edsel said:

The other available elements there involve s. 754 and hot assets.

 

Ah, now more facts are coming to light. You have to figure out if there was a disproportionate distribution of hot assets before you can properly calculate the gain and how much of it might be ordinary income and how much is cap gain.  It's possible to have ordinary income from depreciation recapture too, and you might also have deemed distributions from relief of debt.

Here are a couple of articles that might help:

http://media.straffordpub.com/products/irc-751-hot-assets-calculating-and-reporting-ordinary-income-in-disposition-of-partnership-or-llc-interests-2015-07-09/reference-materials.pdf

The Tax Cost of Hot Assets: https://www.thetaxadviser.com/issues/2010/aug/clinic-story-08.html

 

[Abby Normal]

Support should be able to tell him how to zero out box L. That is partly a program operation. I used negative contributions in ATX to zero out the capital account, and made sure contributions were zero on the basis computation. I know the K1 instructions say to show it as distributions but I don't like doing it that way because it's too confusing. ATX needs a capital transfer tab for these cases.

I did one of these in ATX with hot assets and just use line 20 code Z to let the partner know the hot asset amount. The rest is up to the partner.

[Edsel]

This lively discussion with Judy and Abnormal is appreciated.

Drake technical support is not supposed to tell a preparer how to fill out a tax return.  I call technical support when I know the facts and can't get their software to return an acceptable entry on a line where it should be correct.  If technical support personnel suspects the preparer doesn't know what he's doing, they will back off.  And they should.  That is not their job.

There are no hot answers with the instance in question.  Only a couple of lines in Drake that allow an adjustment for same.

The Drake manual link doesn't provide much help when the link opens a document of 80 pages and neither the table of contents nor the topical index gets you where you need to go. 

Thanks folks for your interest and willingness to help.