Final 1065 (LLC) and K-1s- how final numbers are presented?

[Anastassia]

LLC is closing. Two partners: #1 has beginning negative capital account of 50K, #2 has positive of 60K (70%:30% capital share though, not sure how that happened). Final year income 70K. How this should be allocated and presented on members' K-1s? 

#1- gets 50K ordinary income (box 1) to bring his ending capital to zero

#2 – gets remaining 20K in box 1, but his ending capital now 70K, where is that going to bring his ending capital to zero. I believe on the individual level 20K income is taxable at ordinary, but 70K become ordinary loss?  

Would appreciate any help! Thank you 

[Accountant-Man]

Why does #1 get 50k if they are 70-30? Is income share also 70-30?

[Anastassia]

Giving #1 50K to bring ending capital to zero since its final return? Income used to be 70:30 except for last year when it became 100% income to #2, loss 70:30.

[Accountant-Man]

If that's what the LLC agreement says, then that's what it says.

[Anastassia]

I can not figure out what to do with #2? If I give 50K income to #1 (to bring his equity to zero), how do I bring #2 ending equity to zero and have zero balance sheet?

[TaxMonkey · Accepted solution]

You really need to look further into this to understand why the capital accounts are wrong.  Its likely simply an error along the way.  Perhaps property was distributed and not booked properly, or any number of other things.  You also do not mention anything about debts, but there needs to be an explanation for why the partners capital accounts do not equal the assets of the partnership.

You also would want to confirm how the partnership agreement specifies how the deficit should be restored.  Specifically, if it contains a "qualified income offset" or if in fact the negative capital partner is required to repay.

[Anastassia]

#2 is member for 3 years only, before that there were other members coming and going, that probably created some of the mess in #1 capital account. When #2 joined his contribution covered some LLC debt and remaining portion to make a distribution to #1 (who then seemed not having a basis and should have been given as guaranteed pmt instead?). Currently there is a debt in the company of about 60K, but will be forgiven, so i accounted for that as income for the year. Thanks for your help.