[Jay]

What happens when you receive in distributions more than your capital balance? Meaning, when my basis runs out after taking Partnership Losses (Net Loss) and distributions. Do I claim the difference as SE Income or Capital Gains? Would that show up on the K-1 in a specific way?

REG 82 (08/08/15)

[DISLCPA]

Your basis can be in the negative and nothing happens unless the company closes or you get out of the partnership, then what ever you are in excess of is a capital gain. This is real world not a book answer.

BEC(8/12/16)
AUD
FAR
REG

[Jay]

@DISLCPA Thanks, I was actually looking for a real world answer. So if the basis is negative today and I take a distribution tomorrow.. I don't need to claim that as income and can defer it to when the Business closes or I leave the company?

REG 82 (08/08/15)

[DISLCPA]

That is correct. It is just like when someone cashes in their Roth IRA or Roth 401K, if they have basis then it isn't taxable only a penalty may apply. I have never seen anyone take a distribution that ever exceeded their basis. Most of my clients don't take enough for it to be a concern, the only time we are concerned about basis is when there is talk about liquidating or adjusting ownership. Anything that reduces a basis below zero would result in a capital gain and would not show up on the K-1, it would be in the supporting documents as a worksheet showing partnership basis.

BEC(8/12/16)
AUD
FAR
REG

[Jay]

What about a scenario like..

5 Partners start the business and put 100k each. The business is successful. One Partner leaves and gets his 100k back. But now a new partner buys in for 1 million in Cash. The other 4 partners took that money out of the business. With the Buy-In of 1 million and the remaining partners receiving a distribution from that 1 million. Would that be a taxable event? Or maybe a taxable event simply from the Buy-In?

It's one thing if a business generates income and has a profit where the members claim the K-1 Income but what about when a new member buys in and the other members take out that money. Wouldn't it be taxable because it is not income for the partnership?

REG 82 (08/08/15)

[DISLCPA]

it depends on their basis, if the partners whom are remaining have a basis over 1 mil than the distribution is not taxable it just reduces their basis. the only thing that would create a taxable event would be if the partner withdrew and had to make up basis. A buy in isn't income, it is received capital.

BEC(8/12/16)
AUD
FAR
REG

[Author]

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