How do you allocate income on K-1 of member in LLC who died 10/29/2010?

Asked over 3 years ago - Richmond, VA

2 member LLC that makes S-Corp election on return. Partner with 1/3 ownership interest died 10/29/2010. To account for deceased member's income, do we need 2 K-1's -- one issued to decedent up until date of death and another to the estate picking up the next day? This must come up a lot; can you point me to some IRS guidance?

Attorney answers (2)

  1. Robert Jan Suhajda

    Contributor Level 17

    1

    Lawyer agrees

    Answered . So we have an LLC that elects to be taxed as a corporation then made an S-Corp election. First check the operating agreement to see if it provides for allocation of profits on death of a member. If it is not addressed as I suspect, the S-Corp can issue one K-1 and the income is allocated on a prorated per day basis to decedent share of the income (loss) before and after death or two k-1s could also be issued: 1. to decedent, 2. to estate. Or, do a IRC 1377(a)(2)(A) which will close the tax year and allocate the profits. An analsis must be done to see which method is best. But can you please explain to me why an LLC made an S-Corp election at Robert90701@aol.com.

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  2. Henry Daniel Lively

    Contributor Level 20

    1

    Lawyer agrees

    Answered . Interesting question. When an S corporation shareholder dies the corporate income is then prorated between the decedent and the successor shareholder (most likely the estate) on a daily basis before and after the death of the shareholder. The income that is allocated to the period before the death of the shareholder is included on the decedent's final income tax return (Form 1040). Income allocated to the period after death is included on the the successor's income tax return (probably the administrative trust on a form 1041). IRC Section 1377(a)(1); Reg Section 1.1377-1(a).

    Another alternative is for the S-Corporation to make an election for the interim closing of the books method. This method divides the corporation's year in to two separate tax years. The first year ending when the shareholder died, and the second year from the day after the share holder died to the end of the tax year. All shareholders must agree to this election. IRC Section 1377(a)(2); Reg Section 1.1377-1(b)(1).

    Any individual seeking legal advice for their own situation should retain their own legal counsel as this response provides information that is general in nature and not specific to any person's unique situation. Circular 230 Disclaimer - Advice given in this response cannot be used to eliminate penalties with the IRS or any other governmental agency.

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