Tax implications of liquidating a company

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For example, increasing adjustments are made for additional contributions you make and to reflect your share of partnership income, whereas decreasing adjustments are required for partnership losses and profit withdrawals.Upon liquidation of a partnership, the Internal Revenue Service views the distributions as a sale of a partnership interest; as a result, gains are generally taxed as long-term capital gains to partners.Basis in a partnership is a moving target, requiring frequent adjustments.Partnerships don’t pay tax as an entity but pass a share of their income and deductions along to each partner.Initially, your basis is equal to the amount of cash plus your basis -- or cost -- in any property contributed to the business.Your basis increases and decreases over the years for required adjustments to arrive at adjusted basis -- the amount you'll use to calculate gain or loss after the liquidation.

To recognize a loss, the partner’s basis has to exceed the distribution, and the distribution can only be money, unrealized receivables or inventory.Therefore, partners who have held an interest in the partnership for more than one year as of the date of a liquidating distribution will pay lower rates of tax on the gain than they do on a partnership's operating profit.Michael Marz has worked in the financial sector since 2002, specializing in wealth and estate planning.When a business operates as a partnership, the partners each report a percentage -- which is usually the same as their percentage of ownership -- of annual earnings on their personal returns.As a result, the tax effects of a partnership that makes liquidating distributions only impacts the partners who receive them.

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