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Author: tedhimself Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121061  
Subject: K-1 form question Date: 4/5/2013 2:16 PM
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A fairly large number of Wife's extended family leased a piece of land to an oil company in 2012. One member of the family who is a lawyer set up an LLC.

To keep the math simple, wife's share of the total rental in 2012 would have been $1,100, but the lawyer only sent us $1,000 in 2012 because he is withholding this amount from each member until we get a problem settled with people who contend that they should also be members of the LLC.

The lawyer sent us a K-1 form (1065). When I fill out my taxes according to the entries on the K-1, I find that we are being taxed on the $1,100 dollars instead of the $1,000 we actually received.*

This doesn't seem right to me. There is no assurance that we will ever receive the missing $100.00. I'm wondering if the K-1 was done correctly and how we should handle our taxes since April 15, is getting very close.

*(The lawyer, who is not a CPA, is quite certain that we owe taxes on the $1,100)

How should we proceed?
Thanks,
Ted in Texas - a community property state.
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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 118295 of 121061
Subject: Re: K-1 form question Date: 4/5/2013 2:55 PM
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Sounds to me like the lawyer and K-1 are correct.

In a partnership (or an LLC taxed as a partnership) each owner pays income tax on their share of the partnership's income, whether or not it is distributed.

So yes, you pay tax on $1100 even though you only received $1000 in cash.

But all is not lost. You now have $100 of undistributed earnings in the LLC. That adds to your basis in your ownership interest. When you eventually dispose of the ownership, that $100 will reduce your gain or increase your loss.

So it all works out in the end. But it is possible to pay tax on money that you haven't received.

--Peter

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Author: tedhimself Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 118296 of 121061
Subject: Re: K-1 form question Date: 4/5/2013 3:06 PM
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But all is not lost. You now have $100 of undistributed earnings in the LLC. That adds to your basis in your ownership interest. When you eventually dispose of the ownership, that $100 will reduce your gain or increase your loss.

And if we have to use that extra $100.00 to buy out the other people who contend that they should have been to be added to the LLC., then what are the ramifications tax wise if any?.

Ted

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 118297 of 121061
Subject: Re: K-1 form question Date: 4/5/2013 3:33 PM
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And if we have to use that extra $100.00 to buy out the other people who contend that they should have been to be added to the LLC., then what are the ramifications tax wise if any?.

Hard to say exactly, but odds are you'll end up with some kind of loss or deduction at the partnership level that will get passed down to you as a write off.

Think of it this way. What if you were the only owner? You earned $1100 from the land, but decided to keep $100 in a savings account in case there were some problems. That's effectively what happens in a partnership.

--Peter

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