Partner buyout on balance sheet

[jlew1229]

Partnership with 3 partners.  2 Partners buyout the third for FMV of Rental Property.   Part bank loan, part contributions by remaining partners.   I know to post the loans and contrtibutions on the balance sheet.  But what is the offset. ?   The partners had the RE appraised and paid the outgoing partner his 1/3 of the FMV.   

[qbteachmt]

"Part bank loan, part contributions by remaining partners. I know to post the loans and contrtibutions on the balance sheet."

If you and I take out loans to buy your brother's shares of Ford, that doesn't affect Ford or their stock. If you and I also kick in some personal cash to make that purchase, that also doesn't affect the entity Ford, or show on their balance sheet.

[TaxGuyBill]

Did the Partners buy out the third person, or did the Partnership itself buy out the third person?

If the individual Partners bought out the third (which I suspect is most common), that doesn't really affect the Partnership return.  But then you mentioned "contributions" by the other Partners, which might indicate the Partnership itself bought out the third.

[jlew1229]

but doesn't it affect their equity in the business?   The shareholder basis would change?   

[jlew1229]

The partners themselves bought out the 3rd person.  

[jlew1229]

Correction. 

there is a loan from a bank to the company and then both partners also contributed $27,500 each personally. 

[sjrcpa]

But the partners bought out the other partner?

[jlew1229]

Sounds like I may be using incorrect terminology. 

There were 3 partners on January 1st, there are 2 partners on December 31.   Loans were taken out to pay the Partner that left .

[sjrcpa]

So the Partnership bought out the departing partner?

Do you know?

Do you have the buyout agreement?

And who borrowed the money? Partnership? Or the 2 remaining partners?

[qbteachmt]

"but doesn't it affect their equity in the business? The shareholder basis would change?"

Your partners have a different mix of ownership, yes.

You are now somewhat grasping the issues, as I explained. Try it conversationally.

Some named party or entity or plural, took loan(s) and the proceeds went where?

Some partners put some money of their own, where?

How is the leaving partner being paid? Personally, from each partner? Paid from the Entity? Perhaps the Entity is only "doing the banking" and every payout from the entity really is a draw for each remaining partner, because they did all of this wrong? They put their own money and the loan proceeds into the entity, but really, this is just between three people privately?

[jlew1229]

Partnership has 3 partners.  All owned 33.33% of partnership.  Partner 3 leaves the partnership.    $490, K goes to the 3rd partner as the payout when they leave the partnership.   (Which is 1/3 of FMV of Real Estate in the partnership) There is a $435K loan taken out under the partnerships name.     Partner 1 contributes $27,500.00   Partner 2 also contributes $27,500.  These 3 items come up with the $490K to pay the 3rd partner when they leave.   

I am completing the tax return.   How does this transaction translate onto the tax return?    Remaining 2 partners now own it 50/50.  

[PhoebeRoberts · Accepted solution]

So, this site is a good resource for "I understand the tax treatment of the transaction I'm dealing with, and can look at the forms output and determine if it's correct; I need help knowing where to make my input."

It is an exceedingly poor resource for "I am uncertain of the tax treatment of the transaction I'm dealing with; what input should I make to feel confident that my output is correct."

Partnership taxation is very complex. You need an in-person mentor to walk you through this return, or to refer the client out to someone more experienced.

[qbteachmt]

I agree with @PhoebeRoberts because at this point, the Bal Sheet either hasn't changed, or the new liability is offset by the new asset (loan proceeds), which is 0 effect to equity. However, the people have made quite a mess of things 🙂