Confused about accounting entries when admitting a new partner into a partnership - tax basis vs GAAP?

This is helpful but I'm still confused. If the partnership agreement doesn't say anything specific about this, which method should we default to? And does making a section 754 election change which method we should use?

If the partnership agreement is silent on the matter, there's no default method prescribed by tax law - it's a business decision. The partnership should document which approach they're taking and apply it consistently. The key is to understand what that $750,000 payment represents - is it truly for capital or partly for something else? Regarding Section 754, this election doesn't dictate which method to use, but it allows for an adjustment to the inside basis of partnership assets for the benefit of the incoming partner. This can be valuable when there's a significant difference between the amount paid and the underlying tax basis of the partnership assets. Without this election, you can end up with inside/outside basis disparities that cause tax inefficiencies.

Did it actually recommend which method to use in your situation or just explain the differences? I'm in a similar boat and trying to figure out if the bonus or goodwill approach makes more sense for our new partner buy-in.

I'm skeptical - how does this differ from just asking my CPA? Does it generate the actual journal entries or just give general advice? Our partnership situation is pretty unique with some special allocations involved.

It actually gave specific recommendations based on my partnership's specific circumstances. It evaluated our growth plans, existing asset composition, and partner tax situations to recommend the bonus method in our case, but explained how that recommendation would change under different circumstances. For your question about special allocations, that's actually where I found it most helpful. It analyzed our complex special allocation provisions and showed how they would interact with each accounting method. It doesn't just generate journal entries - it explains the reasoning behind them and the tax impact on each partner both short and long term.

Wait, how does this service actually work? I've been trying to reach someone at the IRS about a Section 754 election for weeks. Does it really get you to an actual IRS person or just connect you with some tax advisor?

This sounds too good to be true. I've literally spent hours on hold with the IRS and never gotten through to anyone who understood partnership taxation. Why would this service succeed where direct calling fails? And if it works, why isn't everyone using it?

It actually creates a priority connection to the IRS phone system. It's not connecting you to a tax advisor - you're speaking directly with IRS representatives. The service basically navigates the IRS phone tree and waits on hold for you, then calls you once an actual human answers. Most people don't know about it because it's relatively new. And yes, it really works - in my case, I got connected to someone in the IRS partnership division who actually understood the nuances of partnership tax. They can transfer you to different departments too, which is how I got to someone who specifically dealt with partnership taxation issues.

That's a really good point! I hadn't fully thought through the tax impact on the existing partners. If we use the bonus method, does that mean they'll have immediate tax consequences? That might make goodwill more attractive despite the accounting complexity.

Yes, with the bonus method, the existing partners will typically recognize income when the new partner pays a premium to enter the partnership. The income is generally ordinary income, not capital gain, which means higher tax rates. With the goodwill method, the existing partners generally don't recognize immediate income. Instead, the partnership is deemed to have this self-created goodwill asset that wasn't previously recognized. This can be better from a current tax perspective, but it creates complexity in tracking this new intangible asset and its future amortization. Also, if there's ever a future sale or liquidation, you'll need to account for this goodwill properly.

Which states caused issues for you? We're dealing with partners in California, New York and Texas - wondering if those were problematic for you.

Great questions! For goodwill valuation, you're generally right that it's calculated as the excess of what the new partner pays over their proportionate share of the partnership's net asset basis. So if your new partner pays $500k for a 20% interest, but 20% of net assets is only $300k, you'd have $200k of implied goodwill. However, be careful - this assumes the $500k truly reflects fair value of the partnership interest. Sometimes the premium might be for other reasons (guaranteed payments, special profit shares, etc.). Regarding your buyout provision - this is crucial! If your agreement values departing partners based on book value, creating goodwill on the books means future buyouts will include that goodwill value. This could make exits much more expensive than originally intended. You might want to consider whether your buyout formula should specifically exclude this admitted goodwill, or if you need to revise the valuation method entirely. Have you run the numbers on what a future buyout would look like under each method? That might help drive your decision.