Tax Treatment of LLC Liquidating Distributions: Income and Deduction Rules, Basis, Tax Distributions, Reporting

This CLE/CPE webinar will provide tax professionals an in-depth analysis of the tax treatment of LLC liquidating distributions and key planning techniques for members and partners. The panel will discuss essential factors in determining the taxability of liquidating distributions of cash and property, exceptions to the general nonrecognition rules, the tax basis in property received in liquidation, the holding period for distributed assets, and other key issues regarding the taxation of LLC liquidating distributions.

The termination of LLCs classified as partnerships involves distributing all of the LLC's assets to its members in the liquidation of their interests. Tax professionals must identify potential tax implications of liquidating distributions and implement planning strategies to minimize adverse tax consequences.

Generally, current tax rules for distributions apply both to distributions that liquidate a member's interests upon termination of the LLC as well as those made with the LLC maintaining its existence. Depending on the manner and circumstances of the distribution, certain payments may be classified as Sec. 736(a) payments and treated as guaranteed payments or distributive shares of LLC income, while other liquidating distributions are taxed under Sections. 731 and 732. Section 736(a) has an important impact on professional partnerships.

Under Sec. 731(a), members of an LLC classified as a partnership for tax purposes do not recognize taxable gain or loss on a distribution unless the distribution exceeds their outside basis in the LLC interest. The same applies under Sec. 731(b) whereas the LLC does not recognize taxable gain or loss on distributions made to members. However, both provisions are subject to certain exceptions that tax professionals must understand along with the potential implications regarding tax basis under Sec. 732.

In addition, a number of other key issues must also be considered in order to minimize tax liability, such as understanding (1) a member's tax basis when property is received in liquidation; (2) the impact of depreciating property received in a liquidating distribution; (3) suspended losses when an LLC distributes assets to a member in a liquidating distribution; and (4) potential legal implications under state law.

Listen as our panel discusses key factors in determining the taxability of liquidating distributions of cash and property, exceptions to the general nonrecognition rules, the tax basis in property received in liquidation, the holding period for distributed assets, and other important issues regarding the taxation of LLC liquidating distributions.