21 Partnerships

Question 1

Define “partnership.”

Answer 1

An association of two or more taxpayers to operate a business that is not taxed as a corporation

Question 2

What is a role of a general partner in management, and for what is a general partner liable?

Answer 2

General partners can participate in management and have joint and several liability for the partnership’s debts.

Question 3

What is the role of a limited partner in management, and for what is a limited partner liable?

Answer 3

Limited partners cannot participate in management, and they are only liable up to their investment.

Question 4

What items increase a partner’s basis in a partnership?

Answer 4

Contributions of property
Proportionate share of income, including gains and exempt income
Proportionate share of increases in liabilities

Question 5

What items decrease a partner’s basis in a partnership?

Answer 5

Distributions
Proportionate share of expenses, including deductions, losses, and nondeductible expenses
Proportionate share of decreases in liabilities

Question 6

Using the carryover basis, what is a partnership’s basis for contributed property?

Answer 6

Carryover basis – Adjusted basis of property in the hands of the partners

Question 7

What is a partner’s basis in a partnership immediately after formation?

Answer 7

Substituted basis from the assets contributed to the partnership

Question 8

What tax forms does a partnership report income on?

Answer 8

Report taxable income on Form 1065
Report shares to each partner on Schedule K-1

Question 9

When do partners report income?

Answer 9

In the year that the partnership tax year-ends

Question 10

Describe the characteristics of a partnership loss deduction limit.

Answer 10

Amount of adjusted basis
To extent at risk
May have passive loss limits
Unused losses carried forward indefinitely

Question 11

What are guaranteed payments?

Answer 11

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.

Question 12

What is the accounting effect of a deemed distribution?

Answer 12

A decrease in the partnership liabilities; therefore, a reduction in the outside basis of each partner

Question 13

What is a partnership distribution?

Answer 13

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.

Question 14

What is a guaranteed payment?

Answer 14

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.

Question 15

What is inside basis?

Answer 15

The partnership’s basis in partnership assets.

Question 16

True or False: Every P/S must have at least one general partner.

Answer 16

True. Every P/S must have at least one general partner. Additional partners may be general or limited partners.

Question 17

Do partners pay self employment tax?

Answer 17

• 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

Question 18

True or False: A guaranteed payment is a separately stated item.

Answer 18

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).

Question 19

Why are charitable contributions a separately stated item for a partnership?

Answer 19

Partners must itemize to deduct charitable contributions on their individual tax return; there are several AGI limitations for individual partners.

Question 20

Are distributions an expense for a partnership?

Answer 20

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.

Question 21

For a partner, what is the difference between outside basis and the capital account?

Answer 21

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.

Question 22

Describe recourse liability.

Answer 22

If a partner is liable (i.e. bears the economic risk) to pay the P/S debt, it is a recourse liability.

Question 23

Describe nonrecourse debt.

Answer 23

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).

Question 24

Is a non-liquidating distribution in excess of a partner’s outside basis treated as a capital gain?

Answer 24

Yes. Gain from a non-liquidating distribution is treated as capital gain by the partner since a P/S interest is a capital asset.