Partnership liquidating distribution detailed example
Sometimes the sale of a company's assets doesn't provide enough money to pay off all the company's debts.In such a case, the rest of the money comes from the capital accounts of each partner.There are 2 types of distributions: a current distribution decreases the partner's capital account without terminating it, whereas a liquidating distribution pays the entire capital account to the partner, thereby eliminating the partner's equity interest in the partnership.Generally, losses are only recognized in a liquidating distribution.The percentage of the losses for which a partner is responsible depends on the partnership agreement.For example, partner A may be responsible for 60 percent of a ,000 debt.The outside basis is the tax basis of each individual partner's interest in the partnership.When a partner contributes property to the partnership, the partnership's basis in the contributed property is equal to its fair market value ( You contribute land to a partnership with a tax basis of ,000 and a FMV of ,000. Since the FMV of the land is also ,000, you each have equal equity in the partnership, and the total inside basis of the partnership is equal to 0,000, your combined contributions.
The money received from selling the assets goes to pay the debts the company owes, even if the company sells the assets for less then their worth.
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Whether earnings are retained in a partnership or distributed to partners has no affect on the taxation of those earnings, since the partners have to pay tax on the earnings whether they are distributed or not.
The company's bookkeeping record includes a total of the amount in this account adjusted for distributions the partner received, additional investments, and the partner's share of company losses.
The liquidation of a partnership starts with a review of the company's assets, including property and cash, and its debts.
The partners receive money from the liquidation of the business last, after the debts have been paid off.