754 Election?

Technical topics regarding tax preparation.
#1
Posts:
5
Joined:
19-Aug-2022 6:50am
Location:
Utah
Hey everyone!
I have a couple of tax issues I'm working on for a cannabis client and I want to make sure I'm doing it right....
There is 3 partnership interest buyouts ... so I'm trying to figure out the selling partners' gain along with the buying partners' basis.
What I've landed on is to follow section 741 in terms of coming up with the selling partners' gain, and I'm having the buying partners step into the basis of the selling partners.
Because there is a going concern for this company, does it make sense to do a 754 election?
Also, does my treatment of gain & basis sound right?
 

#2
sjrcpa  
Posts:
6477
Joined:
23-Apr-2014 5:27pm
Location:
Maryland
The buying partner's initial basis is their purchase price. This is different than their tax basis capital account.
Are you saying the 754 election would result in a step down?
 

#3
Posts:
5
Joined:
19-Aug-2022 6:50am
Location:
Utah
So maybe my understanding of a 754 Election is wrong. How do I go about this?
Here's the fact pattern:
Selling Partner #1 has a negative tax basis of -$19,273 and sold his percentage for $17,500
Selling Partner #2 has a negative tax basis of -$50,853 and sold his percentage for $67,500
Selling Partner #3 has a negative tax basis of -$50,853 and sold his percentage for $67,500

So Selling Partner #1 has a LTCG of $36,763
Selling Partner #2 has a LTCG of $118,353
Selling Partner #3 has a LTCG of $118,353

Buying partner steps into the shoes of selling partners' negative basis, correct? This is without the 754 election.

With the 754 election, what would their step up be and what would that journal entry look like?
 

#4
sjrcpa  
Posts:
6477
Joined:
23-Apr-2014 5:27pm
Location:
Maryland
It's not negative basis. It's negative capital account.
Buying partner gets the seller partner's negative capital account, but their initial basis is $17,500 or $67,500.
 

#5
Posts:
5
Joined:
19-Aug-2022 6:50am
Location:
Utah
Yes, sorry. Capital account. So would the sellers' capital account be ($1,762); $16,647; and $16,647, respectively? Totaling $31,530.
I'm still unclear on what that journal entry would look like... the third one is giving me trouble...
Initial Buyout
Seller #1 Capital Account DR: $17,500
Seller #2 Capital Account DR: $67,500
Seller #3 Capital Account DR: $67,500
Buyer #1 Capital Account CR: $17,500
Buyer #2 Capital Account CR: $67,500
Buyer #3 Capital Account CR: $67,500

Buyer picks up sellers' capital account
Seller #1 Capital Account DR: $19,262
Seller #2 Capital Account DR: $50,853
Seller #3 Capital Account DR: $50,853
Buyer #1 Capital Account CR: $19,262
Buyer #2 Capital Account CR: $50,853
Buyer #3 Capital Account CR: $50,853

Record Gain and bring sellers' capital accounts to zero
Seller #1 Distribution DR: $35,000
Seller #2 Distribution DR: $135,000
Seller #3 Distribution DR: $135,000
Seller #1 LTCG CR: $36,762
Seller #2 LTCG CR: $118,353
Seller #3 LTCG CR: $118,353
Debits > Credits by $31,530 which is the same amount as the buying partners' capital accounts.

Thanks again for taking a look.
 

#6
sjrcpa  
Posts:
6477
Joined:
23-Apr-2014 5:27pm
Location:
Maryland
The buyout does not appear on the partnership books. The transaction took place outside the partnership.
 

#7
Posts:
5
Joined:
19-Aug-2022 6:50am
Location:
Utah
So really, if I wanted to make this simple, I would do the second J/E only from above and call it a day, correct?
The buying partners' outside basis would be different that their inside basis and if I wanted to do a 754 election, I would increase the sellers' accounts for the $31,530 and book the debit as an asset.
Does that make sense?
 

#8
sjrcpa  
Posts:
6477
Joined:
23-Apr-2014 5:27pm
Location:
Maryland
Sweet Leaf wrote:I would do the second J/E only from above and call it a day, correct?

Correct.
 

#9
Posts:
5
Joined:
19-Aug-2022 6:50am
Location:
Utah
You're the best. Thanks for letting me talk through this.
 

#10
lckent  
Posts:
597
Joined:
21-Apr-2014 8:19pm
Location:
Colorado
Sec 743 basis adjustments are not reflected in tax capital accounts.
CPA, Retired
 


Return to Taxation



Who is online

Users browsing this forum: Google [Bot], Google Adsense [Bot], JoJoCPA and 112 guests