H&W Partnership 1065 to a Schedule C

[Lion EA]

H&W 1065. H is slipping into early dementia. Lawyer has him sign over his 50% partnership interest to W while he's still lucid enough to make financial decisions. Gift. No money changes hands. Last day of August 2022. Filed extension to 15 May 2023.

Final 1065. Schedules L & M are my weak points anyway, but wife keeps good records. Balance sheet goes to zeros, right? Distribute to H&W 50/50? Or 50% goes from H to W within 1065 and distribution is 100% to W? Or, something else entirely?

Does it matter, since they file MFJ anyway?

Never dissolved a partnership before. (Trying to get my few biz returns to go elsewhere, but I do this whole family's personal returns, so need to get this done.) What do I need to know?

Service biz, ran a job fair (performers & tech staff to meet summer stock theater casting directors) -- which died out during Covid -- with a "subscription" part that continued. Owned a portable keyboard that's depreciated and some cash in bank. CT-based, so PTET mandatory.

All help gratefully appreciated. 

[kathyc2]

It depends on if it is a true partnership or a LLC taxed as a partnership. 

If it's a true partnership, then everything should be closed out.  

If a LLC then nothing on the company books changes other than combining the equity section combining the partner accounts to an owner equity account. 

 

[Lee B]

The only thing I would add is if it is an LLC, that due to the gifting the W's outside basis and inside basis may end up being different.

[Lion EA]

It is an LLC, H&W only MMLLC for short year, 50/50 so "dissolved" as of the date of the 50% change, Form 1065 for many years, but now a SMLLC.

OK, I think I can do this. Thank you, Kathy and CBSLEE. Very helpful.

(My only other partnership was my own son/wife who are divorcing, so I told son-to-be-ex-DIL to take the returns elsewhere. I will have no 2023 partnerships. Two S-corporations, but they both have bookkeepers. And, a few trusts, but they are dwindling, also.)

[Lion EA]

Not sure I've got it, yet !!

So H was a partner until that last day, so they both get Final K1's with their shares. BS is what BS is on that date, NOT zeroed out?

H's ending capital/basis/etc. is now zero on the last day? And W's is now the combo? Or does it even matter now that it'll be a SMLLC on their joint 1040 for the last 4 months of the year?

[kathyc2]

The business is the LLC.  That didn't change.

Part of the year it was taxed as a partnership and part of the year as SP.  

Nothing was dissolved.  The business can continue on with the same bank account.   Unless they actually took all the money out of the bank account, BS should show the balance of the account. 

I would probably show his ending ownership at 0% and hers at 100%, but I don't know that it really matters. 

1065 return is a final since one owner no longer allows LLC to be taxed as partnership.  Since it's the final 1065 return, K-1's are also final. 

[DANRVAN]

For tax purposes, the LLC designation is irrelevant.

The business is changing from a partnership to a sole proprietor and  will need a new EIN.

Since the partnership has been dissolved for tax purposes, the assets (and liabilities) are considered transferred to the partners in a liquidating distribution.

22 hours ago, Lion EA said:

Lawyer has him sign over his 50% partnership interest to W

I wonder if lawyer understands that partnership ceased to exist the instant H transfers to W.

I think it would be simpler to show the transfer of assets form H to W after distribution; rather than transfer of partnership interest immediately before dissolution.  However, the net basis to W would be the same either way.

[DANRVAN]

14 hours ago, Lion EA said:

H's ending capital/basis/etc. is now zero on the last day? And W's is now the combo?

Everything is zero, the entity no longer exist for tax purposes.

[schirallicpa]

Hate H&W partnerships.  Just sayin.....