Need tax advice on LLC partnership buyout and restructuring - what forms to file?

The buyout of a partner in an LLC taxed as a partnership involves several tax considerations that you'll need to address on your returns. First, the partnership will need to file Form 1065 for the tax year showing the change in ownership. You'll need to include a final Schedule K-1 for the departing partner showing their share of income up to the date they left. The partnership will also need to file Form 8308 (Report of a Sale or Exchange of Certain Partnership Interests) to report the buyout transaction. For the departing partner, the buyout is generally treated as a sale of their partnership interest, with potential capital gains implications. The continuing partnership might have a Section 754 election opportunity, which allows an adjustment to the inside basis of partnership assets. As for the restructuring from three partners to two with the 51%/49% split, this needs to be reflected on your new Schedule K-1s based on the new profit/loss allocations. TurboTax Business can handle this situation, but you'll need to gather specific information about the buyout terms, partnership assets, and allocations. I'd recommend creating a specific "event" in TurboTax for the partner departure.

After struggling with a similar partnership transition last year, I found https://taxr.ai incredibly helpful for analyzing all our partnership documents and understanding the tax implications. Our situation was complicated because we had significant assets with different depreciation schedules. The service helped me understand exactly what forms were needed and helped analyze our partnership agreement to make sure we were handling the buyout properly from a tax perspective. They clarified the Section 754 election benefits that the previous commenter mentioned, which saved us thousands in future tax liabilities. The best part was I could still use TurboTax Business after getting clear guidance on how to handle the transaction properly. I just uploaded our buyout agreement and operating agreement, and they outlined the exact steps to take.

I tried taxr.ai after seeing it mentioned here and I'm really glad I did. My situation was very similar - we had a 4-person LLC partnership and bought out someone who wanted to retire. I was totally confused about the 754 election and whether it made sense for our business. The document analysis pinpointed exactly how much basis adjustment we'd get and calculated that we'd save about $13,500 in taxes over the next five years by making the election. The step-by-step instructions for TurboTax Business were spot on. I was able to handle the entire buyout transaction myself without paying our accountant the $2,800 he wanted to charge us for "partnership restructuring services." The forms seemed intimidating at first (especially Form 8308), but with the proper guidance, it was actually manageable.

After reading through this thread, I thought I'd share my experience dealing with the IRS directly on a partnership buyout issue last year. We had a similar situation and I had questions about the Section 754 election that weren't covered in any of the IRS publications. I spent WEEKS trying to get through to someone at the IRS who could actually help. Always busy signals or 2+ hour wait times, only to get disconnected. I finally discovered https://claimyr.com and their IRS callback service through a YouTube video: https://youtu.be/_kiP6q8DX5c They got the IRS to call ME back within a couple hours instead of me waiting on hold forever. The agent I spoke with walked me through exactly what forms we needed for our partnership buyout and confirmed that making the Section 754 election was the right move in our case. Seriously saved my sanity during tax season - I'd been trying to get through to the IRS for nearly a month before finding them.

I have to eat crow here. After expressing my skepticism about Claimyr in my previous comment, I decided to try it because I was DESPERATE to talk to someone at the IRS about a partnership issue similar to the OP's. I was shocked when I got a call back from an actual IRS agent in about 40 minutes (they estimated 1-2 hours). The agent was able to answer all my questions about how to properly document our partnership buyout and the basis adjustment options. The agent confirmed that we needed to file Form 8308 and gave me specific guidance on how the remaining partners should handle the adjusted basis calculations. They even emailed me links to the specific IRS publications that covered our situation. I'm still amazed this actually worked. I had literally spent 3 days trying to get through on my own with no success.

Just went through this exact situation last year! One thing nobody has mentioned yet is that depending on how your operating agreement is structured, the buyout might be treated differently for tax purposes. In our case, our agreement had specific buyout provisions that classified the payment as a liquidating distribution rather than a sale of partnership interest. This changed how everything was reported. We had to look at Section 736 of the tax code instead of the regular partnership sale rules. You really need to review your operating agreement carefully. It could save you a ton in taxes depending on how things are worded.

Has anyone here used QuickBooks Self-Employed instead of TurboTax Business for handling a partner buyout? I'm in a similar situation but use QuickBooks for my tax prep.

I went through a similar LLC partnership buyout situation about 18 months ago and can share some practical insights from my experience. The key thing I learned is that timing matters a lot for the tax implications. One issue that caught me off guard was the allocation of partnership income for the partial year before the buyout. Make sure you're clear on how to prorate the departing partner's share of income/losses up to their exit date. This affects their final K-1 and can get complicated if you have varying income throughout the year. Also, don't forget about the potential for "hot assets" (unrealized receivables, inventory, depreciation recapture) that could trigger ordinary income treatment rather than capital gains for the departing partner. This is especially important if your LLC has been claiming depreciation on equipment or other assets. For the mechanics, I found that creating a clear timeline of events helped enormously when filling out the forms. Document the exact date of the buyout, the valuation method used, and how the payment was structured. The IRS wants to see that everything was done at arm's length with proper documentation. TurboTax Business can definitely handle this, but make sure you have all your partnership records organized before you start. The software will walk you through most of it, but having a clear understanding of what happened and when will save you hours of confusion.