When are partnership liquidating distributions required


There are 2 types of distributions: a current distribution decreases the partner's capital account without terminating it, whereas a liquidating distribution pays the entire capital account to the partner, thereby eliminating the partner's equity interest in the partnership.

These rules (a) allocate the partnership’s income, losses, deductions, and credit among the partners and (b) adjust basis to reflect each partner’s allocation of those items.

As stated in Taxation of Limited Liability Companies and Partnerships, limited liability companies are taxed as partnerships by default.

To understand the taxation of partnerships and distributions, it is necessary to know the 2 types of tax bases concerning partnerships.

The inside basis is the partnership's tax basis in the individual assets.

No gain or loss is recognized to a partnership on a distribution of property or money to a partner.[27] The one exception is for disproportionate distributions, which are treated as a sale or exchange by the partnership.