LLC Dissolution

[David]

I asked this question last week and didn't get a final answer to my questions.

This is my first LLC dissolution. The LLC has 7 members. Do each LLC member handle their own gain/loss from dissolution on their personal tax returns? Or do I report the gains/losses on the K-1?

If so, where is this entered in the ATX program and where does it get reported on the K-1?

6 of the 7 members have no basis and have negative capital balances.

Do I allocate assets and liabilities to each member and if there is a positive balance left in their equity account, that is reported as a loss? Likewise, after allocating assets and liabilites to the 6 members with negative capital balances and the balance in their equity account remains negative, that is reported as a gain to them on the K-1?

As far as assets, such as computers, that are transferred to the members, are those asets transferred at book value and only when the member sales those assets would a gain or loss be reported?

Thanks for your help.

[OldJack]

>>If so, where is this entered in the ATX program and where does it get reported on the K-1?<<

Maybe you didn't get a clear answer because YOU didn't give clear details. Multi-member K1's are issued from LLC's taxed as partnerships and S-Corps. Liquidating distributions are different. Which are you talking about?

[David]

Sorry if I wasn't clear.

It is a multi-member LLC filing a 1065. My mistake - I thought that would be understood, since a 1065 is the default tax return for a multi-member LLC, unless I specifically said the LLC was taxed as a S Corp.

Thanks for your help.

[OldJack]

Basically in simple words, assets may be distributed in liquidation at the LLC's tax basis to the partners which become the partners tax basis in the asset unless the partner has an outside tax basis. The 1065 would show liquidating distributions as distributions rather than a sale. Such distribution would reduce the partners tax basis. Ideally the balance sheet of the LLC would be zero after liquidation, however, that may not always happen due to possible non-recourse liabilities unpaid. The K1 should show the current year operating income/loss regardless of the equity account balances and such is reported on the 1040. The K1 should show partner ending accounts as zero, negative, or positive balance. Negative usually means the partner has income to report [Recapture of losses at-risk Code Sec.465(e)(1)(A)]on his 1040 due to over deduction of losses unless he has tax basis other than what is shown on the partnership books (outside basis) or he has not deducted the losses. Such loss recapture is determined at the individual partner level per the at-risk form 6198 attached to the 1040. Positive partner account means he has a deduction as he did not receive all his equity on liquidation (could be ordinary or capital loss depending upon partner status).

edit: Forgot to mention that unpaid LLC debt may be taxable income, under forgiveness of debt rules, to the LLC entity, thereby increasing ordinary income on the K1.

[David]

Thanks so much for your help on this.

All LLC debt is amounts owed to the LLC members. Won't these amounts be offset against the member capital account?

If I understand you correctly, I don't calculate any gain or loss for each member on their respective K-1. I just report positive or negative capital account balances on their final K-1 and it is up to each member to properly report their gain or loss on their personal tax return. Is this correct?

Thanks.

Basically in simple words, assets may be distributed in liquidation at the LLC's tax basis to the partners which become the partners tax basis in the asset unless the partner has an outside tax basis. The 1065 would show liquidating distributions as distributions rather than a sale. Such distribution would reduce the partners tax basis. Ideally the balance sheet of the LLC would be zero after liquidation, however, that may not always happen due to possible non-recourse liabilities unpaid. The K1 should show the current year operating income/loss regardless of the equity account balances and such is reported on the 1040. The K1 should show partner ending accounts as zero, negative, or positive balance. Negative usually means the partner has income to report [Recapture of losses at-risk Code Sec.465(e)(1)(A)]on his 1040 due to over deduction of losses unless he has tax basis other than what is shown on the partnership books (outside basis) or he has not deducted the losses. Such loss recapture is determined at the individual partner level per the at-risk form 6198 attached to the 1040. Positive partner account means he has a deduction as he did not receive all his equity on liquidation (could be ordinary or capital loss depending upon partner status).

edit: Forgot to mention that unpaid LLC debt may be taxable income, under forgiveness of debt rules, to the LLC entity, thereby increasing ordinary income on the K1.

[OldJack]

>> I don't calculate any gain or loss for each member on their respective K-1. <<

Correct. Each member determines their tax status with regards to loss deductibility.

Unpaid Loans due members should be treated according to instructions from the partner. Normally you would expect the member to want the loan applied to the capital account, however, if the loan is a well documented loan the partner may want to treat it as a business bad debt on his personal taxes.

[David]

Thanks so much for your help.