Partnership draw

Technical topics regarding tax preparation.
#1
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A brother and sister formed a 50/50 LLC Partnership in 2019 (renting 2 houses) and showed a $3000 profit which each claimed $1500 on K1 but neither took a draw from the Partnership account. In 2020, it looks like about a $10,000 profit which will be a $5000 profit on each K1. They each want to draw $2500 from the Partnership account this January, 2021.

Any problem with that?
And if they do, does that draw need to be documented on their K1 somehow?

Thanks for any help!
 

#2
JAD  
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Are you asking if the 1/21 draw impacts your 2020 tax return?
Or are you asking if they have basis sufficient to take the draw without triggering gain recognition?
Are you maintaining a balance sheet and basis schedules?
Are you familiar with how basis is calculated?
I'm not sure where the starting point is.
 

#3
sjrcpa  
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There is a box on the K-1 for Distributions.
 

#4
Derby  
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Not to be critical, but this is basic partnership tax reporting. Since you prepare 1065s as a professional, you should take a partnership taxation class to get a solid grasp of the basics and common issues you may run into.
 

#5
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Even if you are not preparing a partnership return regularly, wouldn’t you normally look at boxes like distributions and understand what they mean in the context of partnership accounting and reporting to the partner?
 

#6
JAD  
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Be nice. Maybe he is just starting out, as we all were at one time or another.
 

#7
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Five years (or 11) is not just starting out
 

#8
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Schenck:

Partners are taxed on the net profit each year but (generally) not the distributions ( as long as they don't take out more than they made in profits over the years - and some other reasons).

Simple Example:

Partnership makes $10,000 net profit each year, but partners do not take a distribution for 10 years.

Each year, the partners pay tax on the $10,000 profit.

So, after 10 years when they take out the $100,000, is it taxable?
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No! They already paid the tax on it as it was earned each year. They are just moving equity around. It's theirs for the taking. As already indicated, it is reported on the K1 and K1 basis worksheet but it wont make it to the income column on their 1040.

Be sure to track the amount of money moving in and out of the partnership - even if a balance sheet is not required. I strongly recommend doing the balance sheet and capital account schedules even if not required.

If you have no one to mentor you and you are not familiar with this, consider referring the client to a trusted local practitioner. Trade him or her the partnership return referrals for family return referrals.

And/or take a course on entity returns.

And be sure to charge enough for the partnership tax return.
 

#9
Gr8ful  
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Hey ItDepends. Thanks for the detailed example and taking the time to lay it out for the original poster. That’s what this forum is for. Just like the old TaxAlmanac, we’ve got to Suport each other.
Much mahalo!
 

#10
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Right on! This community has been so helpful and kind to me, and so I'm paying it forward on the easier questions. (I'm not the most experienced around here).

There's plenty of pie for everyone in this business. It benefits everyone to help each other.
 

#11
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ItD
One item to note is that your example is nearly spot on for S-corps, but ignores allocated debt which adds to basis in the partnership setting.
MUCH less likely to end up with distributions in XS for a partner.
~Captcook
 

#12
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I think I get it....

So these 1065 property returns have so much allocated debt and relative low cash flow that they seldom have capital gain issues because it would be very difficult/rare for distributions to exceed basis?

While s corporations, on the other hand and by nature, seldom revolve around rental property and often have the opposite in debt-to-basis characteristics?
 

#13
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This is VERY simple issue here and should not be asked by a tax or accounting professional, which is what the is for.
 

#14
Bob A  
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I post/ask frequently for confirmation sake, sometimes to get more in depth info on what may seem like a parochial question and I appreciate every single one of you, even those who answer me in CAPS sometimes. Looking stuff up is good, naturally helpful, but there's nothing like my best friend "confirmation" from those who are much brighter than I.....
 


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