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If the partnership realized a loss, credit the income section and debit each partner's capital account based on his or her share of the loss. Credit each partner's drawing account and debit each partner's capital account for the balance in that same partner's drawing account.
If the partnership decides to liquidate, the assets of the partnership are sold, liabilities are paid off, and any remaining cash is distributed to the partners according to their capital account balances.
Upon the winding up of a limited partnership, the assets shall be distributed as follows: (1) To creditors, including partners who are creditors, to the extent permitted by law, in satisfaction of liabilities of the limited partnership other than liabilities for distributions to partners under section 34-20d or 34-27d;
The following four accounting steps must be taken, in order, to dissolve a partnership: sell noncash assets; allocate any gain or loss on the sale based on the income-sharing ratio in the partnership agreement; pay off liabilities; distribute any remaining cash to partners based on their capital account balances.
Partnership reports distributions of all other property on Schedule K, line 19b and on Form 1065, Schedule M-2. Liquidating partner determines if he must recognize gain or loss from the transaction on his Form 1040.
Liquidation of Partnership Property Provided the liquidation terminates your entire interest in the partnership, your tax basis in the distributed property is equal to your adjusted basis in the partnership interest minus the cash distributed to you.
Definition: Partnership liquidation is the process of closing the partnership and distributing its assets. Many times partners choose to dissolve and liquidate their partnerships to start new ventures. Other times, partnerships go bankrupt and are forced to liquidate in order to pay off their creditors.
A partner may recognize a loss on a liquidating distribution if the distribution consists only of cash, inventory or unrealized receivables. The net investment income tax (NIIT) which is reported on a partner's Form 8960 can potentially apply to gains reported by partners that are individuals, estates, and trusts.