What does “Ending Capital” mean in a K-1 for a Partnership/LLC filing an IRS 1065 Tax Return?

The Ending capital account represents the monetary investment “left” in their account after all the increases (money contributed and profits reported) and decreases (money taken out and losses reported). Positive Capital means they can take cash/distributions out beyond the profits in future years without paying a capital gains tax; in contrast, negative capital means the shouldn’t be taking any cash/distributions or they could be subject to a capital gains tax. If the capital is negative, it is suggested to contribute cash to make it positive and/or to have profitable years without taking cash out to make that account go up.
If the company’s shares/interest is sold, the capital gain will be the sale amount minus the ending capital. Based on these two numbers this could render a capital gain or a capital loss on the personal tax return.
One additional note: If the company has losses one taxable year (either via Ordinary business income/loss or Net rental income/loss) and these losses supersede the partner’s ending capital; there will be a limitation on that person’s personal tax return in terms of how much of that loss they can take. Usually you can only take a loss up to the amount of your capital invest or “at risk” which essentially is represented by that Ending capital account.
If there are losses and also from debt/liabilities, we need to take a closer look at wether those liabilities are Recourse or non-recourse to see if they can be added the basis (this is called “outside basis”) to see a loss with negative or low capital could be used in the individual’s tax return to offset other income; when the liability are “recourse” then they act as capital for the purposes of reporting losses.
In this example, we see a loss of $13,976 but with a positive ending capital of $41,094.  In theory, this partner can pass-through the loss in the personal tax return.

If the loss was let’s say $50,000, then the taxpayer could take $41,094 in losses and suspend the other $8,906 for future years.   BUT, if the Recourse liability to the partner was $8,906 or more, then they could take the whole $50,000 loss in theory.

Note: I would also like to add that there are more deep nuances about the type of income: Ordinary vs. Rental Real Estate vs. Capital Gain and wether the partners have active participation or not (typically indicated by General vs. Limited partner checkbox, but is not always the case).   This is the kind of stuff that make a CPA’s worth their wight in gold, because it can get hairy real fast.

Hector Garcia

Hector Garcia

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