USA K1 Question

[Justin G]

If "New Investor" buy a 10% interest in a company for $100,000 from "Existing Investor", is it acceptable for the $100,000 to be listed in Part II Section L "Capital contributed during the year"? The transaction was between two investors. The money did not go to the company. I understand that maybe there are other ways to account for this transaction but is this method acceptable?

 

[DrStrangeLove]

A couple things first: What kind of entity is this? Partnership? S-corp?

Just so I'm clear: New Investor paid Existing Investor directly, outside the entity, correct? The total amount of capital contributed to the entity by all investors didn't change between the start of the year and the end of the year, correct? New Investor bought a portion of Existing Investor's share in the entity, correct?

 

[BIG E]

That's the way I interpret OP. In that case, there's no entry on the entity's books.
It's an addition to owner's outside basis.

 

[Justin G]

It's an LLC taxed as an S Corp. Yes, I think you understand the fact pattern.

My question is on the New Investor's K1 is it allowable to put the $100,000 purchase (outside of the company directly to Existing Investor) in Section L under "Captial Contributed During the Year"? I understand this might not be the preferred way but is it acceptable?

 

[BIG E]

No - the purchase did NOT involve corporation's assets. It was a direct purchase from seller to purchaser directly, outside the corporation.

 

[DrStrangeLove]

No - the purchase did NOT involve corporation's assets. It was a direct purchase from seller to purchaser directly, outside the corporation.

OP, this is my thinking, too. If the entity were a C-corp, you'd simply have bought shares from another investor, which wouldn't change the contributed capital of the C-corp. Similarly, the S-corp here has always had the same amount of contributed capital. You had no transactions with the S-corp as an owner in purchasing your interest. So it's not a contribution of capital.

 

[Justin G]

Thank you both for your replies!