USA Converting equity to debt in a SMALL business

[cgfisk]

I'm a part owner in a pizza place that is not producing any cash for me to pay taxes on my paper income. Also, my partner is never on time in the tax prep angle, so it's causing me to file extensions every year.

Can I convert my interest in the company to debt without a crazy tax implication?

 

[kirby]

You need to read your ownership agreement and see what it says about ending your equity ownership.

 

[cgfisk]

There is almost nothing related to this - only that divesting any equity must be agreed to by all parties. It has been agreed to. It doesn't, however, spell out ramifications.

 

[kirby]

IF your tax basis in the business is the same as your book basis and IF the co-owner pays you an amount equal to the book basis then there is no gain or loss. BUT that is a LOT of IFs. So you better have this looked at in detail by your tax person. AND ALSO have them figure out the effect on your income from no longer being a co-owner and no longer sharing profit from the business.

 

[cgfisk]

Thanks Kirby, that's just it. My equity position in the company has increased due to paper profits, but there has been no cash to distribute. I don't suspect any foul play, but I am not interested in owning a part of a business that isn't paying me any distributions other than a tax bill. My basis has increased to well over what I paid in, which if I read you correctly, would result in a taxable gain? Would this conversion be possible at my original investment and the remainder of the equity be "purchased" by my partner for a nominal fee? I'm just looking to get out of this scenario as quickly and inexpensively as possible.

 

[kirby]

You have one shot to do this right which is why the best course is to have the buyout looked at by your tax person before it happens. Only your tax person knows your unique tax / cash situation and can guide you accordingly. One example: you may be in a partnership,, a C corp, etc and each has their own tax rules.
Further, you need to use your OWN tax person and not the one who works for the other owner and not the other owner, if he/she does the taxes for you both. Then ask your own tax person why the pizza business generates profits but no cash. Like, are people paying for pizza with long term notes payable??