How do I report a departing LLC member?

[david3]

An LLC member is bought out of a 3 member LLC  for $18K. His capital balance was $6K at the time.  So there is a $12K negative capital balance left on the balance sheet for this member.

There are no hot assets or debt - only cash and fixed assets.

The buyout agreement states that the company will buy out the member. Another member also contributed $18K capital and is now a 2/3 member while the other remaining member remains a 1/3 member. This probably is irrelevant.

How do I report this in PS? The departing member's capital balance is showing negative $12K. Do I simply enter a positive amount for $12K in the "Other Adjustments" line on that member's K-1 Wks?

Where is the $12K negative balance reported in the balance sheet and the tax return?

Thanks.

[TaxMonkey · Accepted solution]

Are you familiar with IRC 754 election and partnership basis adjustments?

Regardless, the capital account of the partner being bought about must be zero, so a phantom contribution should be made to zero out his capital account.  The will result in a phantom asset on the partnerships balance sheet. This will be non deductible to the partnership, baring a 754 election and all that entails.

[david3]

Doesn't the IRC 754 election apply to a purchasing member? The LLC bought out the member.

[david3]

Also, the FMV of the assets are not higher than the book value so a 754 election wouldn't make sense.

Thanks.

[TaxMonkey]

754 applies to partner liquidations as well, but it is optional.  for some reason the partner got $12k more than his investment in the partnership warranted, if it wasn't due to an asset increase, then its goodwill.