Partnership final return

[Pacun]

Partners didn't like each other anymore and last January they split. The previous years they have purchased little items that were not depreciated and last January they split those Items for a total of $2000. For example they split 16 soft rigging at $2 each FMV (cost $4 new). Now it is time to show those $1000 on each partners return. Should that go on K1 or somewhere else. This was a teaching and acrobatic performances so they were buying their tools and fabrics and the partnership was making money. No basis for both partners. Thank you.

 

[Terry D EA]

Well first off, the monies each of them spent and gave to the partnership (little items you mention) would make-up their individual basis as well as be capital contributed. If you are ending the partnership, then each partner's portion may be a return of capital and therefore it would not be taxable to either partner. You said "they purchased" are they splitting what was left or not used by the partnership? What was their initial cost to purchase these items? It still seems to me to have the character or a return of capital. One example is a partner invests 10,000 cash in a partnership and decides to leave the partnership. The other partner(s) pay out any remaining capital/basis and therefore the amount received would be taxable.

[Pacun]

No. they started the partnership without any investment. As they worked, the partnership was buying things. Let me give an scenario:

I want to prepare taxes as a sole and was a VITA volunteer and then I worked for some one for a couple of years.
On January 2, 2010, I go to my friend and I said: "You have an office for your translation business, can you let me use a desk and your phone and I will do taxes and I will pay you $500 for rent for the 4 months I will be there and another $500 for the rest of Saturday mornings that I will meet clients to reply letters from the IRS or other things". My friend replies, "no problem and you can pay me the rent one month so your first payment will be Feb 1".

I go and buy the software which costs $1,200, and I installed it on an old computer (with printer) that is paid off or gifted to me with a FMV of 0. Then I buy one Case of paper $40, 100 folders for $50. I pay $50 for my PTIN.

I take care of my first 80 clients and I pay the rent, and buy more paper and folders, toner, a new printer.

At the end of the year, I made $20,000 and I have this expenses which I deduct them on my first schedule C:

Organizational expenses: $1,200 + $40 + $50, + $50
Toner expenses $180
Rent $2,500
Paper, folders, envelopes, pens (supplies) $2000

On December 27, 2010 and every year after, I buy my software, a bunch of toner, paper, folders, and I rent a computer for the next 6 years.

On December 27, 2015, I decided not to rent a computer anymore and I purchased a new computer for the business and I install the software on Dec 30th and make a few test run and I prepare some 1099s for my clients.

I expensed everything on my 2015 taxes and on January 24, 2016 my taxes are filed and paid.

On January 29, 2016, right before I meet my first client for 2016, I have a heart attack and I cannot longer prepare taxes but I am left with a bunch of toner, paper, manila folders, pens, pencils, calculators, hole punchers, a printer, a new computer, envelopes, rubber bands, paper clips, etc.

So I didn't prepare any taxes in 2015 so my schedule C will read 0. My friend understand and doesn't charge me any rent because I didn't use her office this year. All my organization expenses were expensed on the year incurred, so no basis on my business. What should I do with those thousands of dollars in equipment and supplies? (leave computer alone please).

[Terry D EA]

Well your scenario is not a partnership as you don't mention anything about a partnership agreement. Did the client's in your OP have a partnership agreement? If not, then no partnership. If they did not expense or depreciate those items, then no reason to show them as taxable on their respective returns.

>>>>>>I expensed everything on my 2015 taxes and on January 24, 2016 my taxes are filed and paid.<<<<<<  If this is the case, then you have already expensed as you say everything you purchased. You can now sell the items, if you chose, and any proceeds will become taxable. Same thing goes if you convert the equipment to personal use, then there is a taxable gain to declare.

 

[Pacun]

Correct, no partnership involved in my scenario but the same could applied to me if I had a third person as a partner.

I have read in other posts that at the end of a partnership you just pick up your marbles, which is not true. Thank you for the info.

 

[DANRVAN]

18 hours ago, Pacun said:

Partners didn't like each other anymore and last January they split. The previous years they have purchased little items that were not depreciated and last January they split those Items for a total of $2000. For example they split 16 soft rigging at $2 each FMV (cost $4 new). Now it is time to show those $1000 on each partners return. Should that go on K1 or somewhere else. This was a teaching and acrobatic performances so they were buying their tools and fabrics and the partnership was making money. No basis for both partners. Thank you.

 

I am not sure what your question is. Are you saying the small items were expensed vs depreciated; or not expensed at all? In any case just show as a liquidating distribution of partnership assets.

Technically, I believe the basis for any depreciable assets would  be reduced by depreciation allowed or allowable in the hands of the partnership.

[Pacun]

Yes, they were not  depreciated, but rather expensed. I think you are right it is a liquidation of partnership assets which becomes ordinary income, correct?

[Terry D EA]

Regardless whether the items were expensed or depreciated. Their cost is reduced by depreciation allowable. I don't know if the term "ordinary income" is correct but it FMV at the time of the liquidation of these assets is definitely a recognizable gain to each partner.

Again, and as I stated earlier, if there was not a partnership agreement then no partnership existed. However, I think the same rules above apply.

[jklcpa]

39 minutes ago, Terry D said:

if there was not a partnership agreement then no partnership existed.

 

Partnership agreements can be oral and are binding. Nothing says they must be in written form.

Or do you mean that the partners had no agreement at all, written or oral?

[Terry D EA]

The OP just said "Partners" and that's it. Not really sure what the situation is. I am assuming there wasn't a partnership and I asked a couple of times about an agreement or elsewise and didn't really get a definitive answer. So, I don't if the partner's had an agreement in any fashion. I just think this is being turned into way more than it needs to be. JMHO.

[DANRVAN]

-General rule for liquidating distribution:  gain = "money" received in excess of  partner's adjusted basis.

-Basis of property received = partner's basis less money received.

-No gain recognized until property is disposed by partner.

[kcjenkins]

Clear up a few details, please.  Did they operate the business jointly?  Did the business have a name?  Did 'the business' have a bank account?  Did the business buy the supplies, or the individuals buy them?  When they got paid, where was the money deposited?  If the answer to most of these questions is "yes" then they did have a partnership.  How long did it operate?  Were tax returns filed?  

[Pacun]

Yes, they had an LLC. The LLC had a bank account, all 1099 were made to and from the LLC. The LLC paid for the supplies and they operated for about 5 years and each year the partners received K1s. When I said a Partnership on my original post, I meant a partnership.

Will the FMV of the items split go to K1 (partners have no basis) or should that amount be reported somewhere else?

 

[jklcpa]

Distributions of property are reported on 1065, page 4, line 19b and will flow to the K-1s and also page 5 to M-2, line 6b.

[Pacun]

Thank you.