This question is about distribution in excess of basis - tax impact on individual:
I am a partner in a LLC partnership run business. Every year, our accountant files 1065 K-1 for each partner. We had refinanced our business so our mortgage went up but we were able to obtain the refinance amount in our bank account.
My capital basis as of Dec 31 2009 was $0. I took a distribution check on my name from the partnership on Dec 25, 2009.
My accountant is saying that the distribution amount will be reported on Schedule K-1, line 1 (as ordinary income) AND also on Line 14, box a - it will be subject to the self employment tax.
Question 1 - Is this correct tax treatment ? I thought I would only pay regular tax, not the additional Self-Employment tax.
Question 2 - The accountant has not yet finalized/filed the K-1. Can I return the amount back to the partnership this year, BEFORE the accountant files the K-1, thus negating the tax consequence?
Question 3 - I have heard of 1031 exchange. Could I have (or in future) have the distribution sent directly to a 1031 type investment ? (E.G. I have heard of Oil/Gas Master Limited Partnerships, REIT, Health REIT, etc.) Would that allow me to DEFER the capital gains tax ?
I'd appreciate any tax related help and the specific IRS publication that explains this, or any other tax website.
(1) There really isn't enough information. A distribution in excess of basis would generally be a capital gain. However, guaranteed payments (generally based on services rendered, not on partnership income) are ordinary income and subject to SE tax.
(2) You could ask your accountant whether part of the payment could be a loan to you. To be a valid loan, there would have to be a signed loan agreement and you would have to pay the partnership back a reasonable rate of interest.
(3) A 1031 exchange involves qualifying business or investment property. Partnership interests are specifically excluded from qualifying for a like-kind exchange.
answered 28 Apr '10, 13:21
Trust your accountant. Or hire a new one :)
answered 28 Mar '10, 19:18
Dont Trust your accountant! Question everything.... you are the one who has to deal with the consequences of signing or being apart of the tax decisions made. If you find yourself questioning your accountant a lot and not capable then hire a new one.
answered 11 May '11, 19:09