Partnership - Distributions greater than basis - How do I show this on the partnership returns? Accounting method change causing problems. See additional details.

[CMEA]

A partnership changed it's accounting method two years ago. Because of that there is significantly more cash in the business than has yet been recognized as revenue. The partners have withdrawn significant amounts of this cash as distributions, but because it has not yet been recognized as revenue, they have distributed more than their basis in the partnership. How do I show this on the return? Where do I deal with it on the Sched L, M-1, M-2?  If it is a capital gain, is there a way to show this on the tax returns so that everything reconciles? Right now, I am showing a negative basis, and so I cannot e-file. Just not sure how to deal with this, how to keep the basis at $0 - what happens with the rest on the return, and how do I make it pass through to the owners? 

[sjrcpa · Accepted solution]

Distributions in excess of basis are not a partnership return item. You can add it as supplemental info on each partner's K-1. Show the total distributions in the Distribution box on the K-1.

You can't have negative basis. Do you mean the capital accounts are negative? And that is preventing efiling? I haven't seen that be an efile problem before. (But all kinds of poblems are cropping up now) What is the efile diagnostic?

It is a capital gain on the partners' tax returns.

[CMS_VA_CPA]

So how can you collect cash without it being either revenue or a liability, both of which increases basis?