Accounting for a Limited Partnership Distribution

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Distributions from a partnership consist of a partner’s share of income as well as partial or complete liquidation of the partner’s interest in the partnership. A distribution is accounted for by the partnership as a reduction in the partner’s capital ownership of the business. Partner capital is also referred to as the partner’s basis inside the partnership. General partners and limited partners both can receive distributions, but only a general partner controls operation of the partnership.

Types of Partners

A limited partnership has partners who do not actively operate the venture and have limited liability for debts of the business. General partners manage a limited partnership and are liable for all business debts. The authority of a general partner has no impact on the allocation of income among limited partners and general partners. Each partner is entitled to his share of the partnership’s income.

Guaranteed Payments

Partners are generally not treated as employees of the partnership and therefore do not receive wages. Rather, they are paid with distributions. Some partnerships, however, permit the general partner managing the business to receive special compensation for his personal services. These are called guaranteed payments. They are accounted for as expenses rather than distributions.

Distribution Categories

Most distributions to partners are their shares of income in the partnership. A partner’s distributions do not change the partnership’s income. Instead, distributions of income are accounted for by the partnership as return of capital to the partner. Distribution of property other than cash is usually not recognized as a gain or loss by the partnership. Rather, the partnership simply accounts for its basis in the property as a distribution. The basis is the value for the property in the accounts of the partnership. However, distributions of accounts receivable or substantially appreciated inventory are treated as sales by the partnership, which results in accounting for gain or loss.

Partner’s Tax Accounting

Most distributions from partnerships do not cause a taxable gain or loss for the partner. Instead, these distributions are simply nontaxable returns of the partner’s capital. Exceptions exist if the distributions consist of property other than cash or if the distributions exceed the partner’s basis. A partner’s basis is generally his original investment plus his share of income minus past distributions. Guaranteed payments are taxable income of the partner receiving them.

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