743(b) Allocation to Cash Basis A/R?

Technical topics regarding tax preparation.
#1
MWEA  
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Two partners, there is a 754 election in effect. One partner sells 50% of his interest to an outside buyer. The selling partner has $100,000 allocated to him in A/R with a zero basis (cash basis T/P). For the moment, assume no other assets and the difference is allocated to goodwill. The 743(b) adjustment is calculated, pretend it's $200,000.

Seller would report $50,000 (50% of A/R) as Sec. 751 ordinary income. The purchaser is able to allocate part of the 743(b) adjustment to the A/R to offset that income as it's collected, correct? I feel silly asking it but started to question myself when actually working through the numbers.
 

#2
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MWEA wrote:The selling partner has $100,000 allocated to him in A/R with a zero basis (cash basis T/P).


Do you mean the partnership has $100,000 of cash basis A/R at the time of sale and the selling partner owns 50% of that?


If so...Technically, it's not a deduction, but the purchaser has basis in their 50% share of the outstanding A/R, which means they don't recognize income when it's collected. In practice, I think most folks record a deduction, which nets out the same.
~Captcook
 

#3
MWEA  
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Yes, I believe that’s what I meant. Seller owned 100% of the $100,000 AR prior to selling 50% of his interest. Seller and buyer now will split incoming AR 50/50 as collected.

Thank you for responding!
 


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