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Karla

Help !! 1065 Question

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My question is...

On the partnership 1065 , I have 2 guys that  formed this partnership LLC several yrs ago   with rentals and the like,  in the last few yrs they started to flip houses as well. All has been pretty smooth until this yr. One of the partners has an uncle who has been loaning the "working capital" which the partnership pays  him principal  some interest after the flip sales. Well in 2019 he loaned 100,000  to partnership on a amortized schedule. The 2 partners each took 50,000 , which they called a loan so under the impression that it would not be taxable to them as they were paying the uncle bac I explained that the partnership was paying back the loan as the loan was given to partnership. Yes the money given to partners is taxable. I have also asked what the 100,00 loan was for per Uncle and why did he amortize it? So far that question has not really been answered. What when and where does the loan go if it doesnt really fit in any IRS rules and if it was used for guaranteed payments? I have spent hrs on this and would like some input please!!!

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Do you have a set of books for this partnership, or are you trying to prepare the returns without proper bookkeeping or without an income statement and balance sheet?  Record each element as separate transactions within the set of books instead of trying to lump all this activity together and it should become clearer.  If not, then it seems to me that this may all be beyond your current skills as a preparer. 

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Kansas Karla -

Your mind is trying to run everything together...like Judy says, Sit back and concentrate on these transactions one by one.

The Uncle is not a related party, according to IRS definition.  That is fortunate as it avoids other problems.  Simply record a Notes Payable to the partnership for $100,000.  At the time of this transaction, the amortization is irrelevant.  So each partner then walks away with $50,000 each?  Set up a "Loans to Partners" account (preferably 2 accts, one for each partner) for $50,000 each.  At this point, neither partner has to pay tax because it is a loan.

Going down the road, it becomes more complicated if these partners think the loan can sit on the books forever and them NEVER pay tax.  This phenomenon is common and has consequences.  There is a matter of imputed interest which affects the partners, and there can always be the IRS waiting in the wings to reclassify the loan as income if there are no characteristics that qualify as a loan.  A loan has to be paid back, and if the borrower doesn't pay it back there are consequences.

If you really want problems, just think of what happens if one partner pays back the loan and the other doesn't?  Will this "uncle" stay uninvolved?  If they can't pay the loan back, what makes anyone think they will be able to pay uncle back?  There are personal problems with this whether there are problems in the books or not.

Are you a preparer, or a bookkeeper, or just a friend trying to "help out"? 

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On 7/27/2020 at 7:00 PM, Karla said:

. What when and where does the loan go if it doesnt really fit in any IRS rules and if it was used for guaranteed payments? 

Karla,  sounds like you need to explain to them that in this situation with 50/50 partners,  GP does not change the amount of taxable income at the partner's level.

While the GP is reported as income to the partner, an equal amount is recognized as an expense by the partnership and passed through to the partner.

For example, if partnership income / loss is zero, $100,000 GP will reduce it to $(100,000). Then each partner will report $50,000 GP and a loss of $50,000, which nets out to zero on their K-1's.

They can also call it a draw with zero effect on taxable income to partner.

So then you have two separate transactions to record, the loan from uncle and the GP to partners.

What they need to be concerned about is how GP or draw will effect capital accounts.

 

 

 

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