21 Partnerships Flashcards
Define “partnership.”
An association of two or more taxpayers to operate a business that is not taxed as a corporation
What is a role of a general partner in management, and for what is a general partner liable?
General partners can participate in management and have joint and several liability for the partnership’s debts.
What is the role of a limited partner in management, and for what is a limited partner liable?
Limited partners cannot participate in management, and they are only liable up to their investment.
What items increase a partner’s basis in a partnership?
Contributions of property
Proportionate share of income, including gains and exempt income
Proportionate share of increases in liabilities
What items decrease a partner’s basis in a partnership?
Distributions
Proportionate share of expenses, including deductions, losses, and nondeductible expenses
Proportionate share of decreases in liabilities
Using the carryover basis, what is a partnership’s basis for contributed property?
Carryover basis – Adjusted basis of property in the hands of the partners
What is a partner’s basis in a partnership immediately after formation?
Substituted basis from the assets contributed to the partnership
What tax forms does a partnership report income on?
Report taxable income on Form 1065
Report shares to each partner on Schedule K-1
When do partners report income?
In the year that the partnership tax year-ends
Describe the characteristics of a partnership loss deduction limit.
Amount of adjusted basis
To extent at risk
May have passive loss limits
Unused losses carried forward indefinitely
What are guaranteed payments?
Those made to partners without regard to partnership income.
Ordinary income to recipients at the partnership year-end.
They reduce partnership income and therefore reduce each partner’s share of income.
What is the accounting effect of a deemed distribution?
A decrease in the partnership liabilities; therefore, a reduction in the outside basis of each partner
What is a partnership distribution?
Withdrawals of cash or other property from the partnership that may be received by a partner as a distribution of current or prior period earnings (current distribution) or a distribution in partial or complete liquidation (liquidating distribution), reducing the partner’s basis in the partnership, although not below zero, by the amount of money or the adjusted basis of property received.
What is a guaranteed payment?
A payment to a partner that is not contingent on the partnership’s profit or income, such as salary or interest, treated as if it were due to a third party but taxed as if a distribution of ordinary income. It is not considered a separately stated item to the partnership paying it, but it is a separately stated item to the partner receiving it.
What is inside basis?
The partnership’s basis in partnership assets.
True or False: Every P/S must have at least one general partner.
True. Every P/S must have at least one general partner. Additional partners may be general or limited partners.
Do partners pay self employment tax?
- All guaranteed payments for services are self-employment income (general and limited partners)
- General partner pays self-employment tax on their pro-rata share of P/S’s net ordinary business income
True or False: A guaranteed payment is a separately stated item.
False. Guaranteed payments are deductible as an expense when computing the P/S’s net ordinary business income or loss. Guaranteed payments are taxable as ordinary income to the partner receiving the payment (reported on partner’s Schedule K-1).
Why are charitable contributions a separately stated item for a partnership?
Partners must itemize to deduct charitable contributions on their individual tax return; there are several AGI limitations for individual partners.
Are distributions an expense for a partnership?
No. Distributions from the P/S to a partner are not an expense of the P/S and therefore are excluded from the computation of net ordinary business income. Distributions are not a separately stated item either. Generally, each partner treats distributions as a nontaxable return of capital.
For a partner, what is the difference between outside basis and the capital account?
Basis and capital account are computed in a similar fashion, except:
* Liabilities of the partnership do not affect the capital account, and
* Contributions to and distributions from the capital account are accounted for at FMV.
Describe recourse liability.
If a partner is liable (i.e. bears the economic risk) to pay the P/S debt, it is a recourse liability.
Describe nonrecourse debt.
If no partner is responsible for paying for the P/S debt, it is considered a nonrecourse liability (e.g. generally secured by collateral). The lender bears the risk of nonpayment (e.g. loan collateralized by the property).
Is a non-liquidating distribution in excess of a partner’s outside basis treated as a capital gain?
Yes. Gain from a non-liquidating distribution is treated as capital gain by the partner since a P/S interest is a capital asset.
