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teddynn
March 7, 2023
Question

How to record Buy out partner at cost plus 1st year profit

  • March 7, 2023
  • 1 reply
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My partner and I invested 66K each to start up a business in 2021  . After first year business had 70K profit . We were able to depreciate $20K equipment therefore taxable income was 50K. On 2021 the 25K profit  of each partner was report on 2021 K1- 50% of 50K taxable income after depreciation. My partner withdrew by the end of 1st 2022. I paid her 60K start up cost plus 35K profit  of 2021( which 25K was reported on 2021K1) plus $1500 profit earn in 1st 2022. 

 

Please advise me how to post the buy out that reflex her gain of 10K in deprecation in 2021 and 1500 profit earn in 2022

 

Thank you very much for your help

Regard

 

 

 

1 reply

Rustler
Rustler
March 7, 2023

You need, need to sit down with a tax accountant.

 

If there are only two partners to start with, then you are not buying out the other partner, you are closing the partnership. A partnership requires that there be two or more partners. A one owner business is called a sole proprietorship. An SP is still a pass through type of business. But the partnership closes (final IRS filing, closing the sales tax account, etc etc) and the SP starts with a new set of books, a new sales tax registration, etc etc.

 

The first thing you do is distribute Retained Earnings to the two partner equity accounts, then close out equity drawing and equity investment to equity per partner. That amount in the partner equity account is the partner share of the business.

 

If you want to pay the other partner anything above that amount, that is up to you, but to that partner it will income which is taxable.

 

Each partner gained a tax advantage for the year that was filed for business startup expenses, depreciation, etc, so that money is accounted for, if you repay it then it is taxable income.

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