Expert: John Kirk, CPA Date: 7/23/2008 Subject: deductibility of expense item for a s-corp
Question Hello Mr. Kirk,
I am in the midst of preparing a Form 1120s for a single-member LLC. The LLC's owner was sued and held liable for an old equipment lease from a prior business that has been disolved. The prior business partner kept the equipment and left this partner with the debt. How do I handle the bookkeeping for this cash basis tax entity? He has to pay $20k in 40 equal installments of $500. What account should I code the $500 payments to? He wants to show the liability of $20k on the balance sheet, but what's my debit? Thank you very much for your help.
Answer Has the other business filed its final return? If not, amend the 1065 and show the equipment as a distribution to the partner.
If a final return has been filed and the books are closed, the debit is a charge to the shareholder's equity account. You have no asset or expense.
On the dissolution of the partnership, what did your client receive for his capital account? If it were an equal distribution, he should have received $20k more than the other partner.
