Redemption of LLC ownership with a negative tax basis

[sumluck]

I have a LLC with multiple partners.  One partner's interest was redeemed.  Partner was given back his original investment of $200k.  But the partner has accumulated operating losses for the past few years resulting in a negative basis of $210k.  I know the redeemed partner needs to pick up the gain of $210k on his individual tax return.  But I am not sure how to report it on 1065.  If I book a gain of $210k with offsetting increase to equity, the book is balanced, but the basis on the partner's K-1 doesn't get zero out.  I feel that I am missing something.  

[sjrcpa]

That's a negative capital account, not negative basis.

You'll have an other increase to bring that partner's capital account to zero. His gain or loss on redemption is outside the partnership.

You'll have other decreases to the other partners' capital accounts that total the same account.

[sumluck]

Thank you for your reply.  I am trying to think through this for the past couple of days, and I am still not quite sure I understand all the impacts.  1) The partnership is pretty simple that there's no debt basis.  So isn't the tax basis the same as capital on K-1 Item L?  2) If we reduce the existing partner's capital as Other decrease, doesn't that reduce the existing partner's tax-method capital/basis?  

[sjrcpa]

Capital account, even if tax basis, does not equal basis. Basis can never be below zero, but capital account can.

[sumluck]

Agree.  But my question is still on the reduction of existing partner's capital.  Does this reduce the existing partner's basis?

[sjrcpa · Accepted solution]

No. It's a bookkeeping entry only.

When you're done adjusting the capital accounts, you'll have a prime example of why capital account does not equal basis.