5.2 & 5.3 & 5.4 - Partnerships

Question 1

A flow through entity which means that the income is taxed only once when t flows through to the partner

Answer 1

`a partnership

Question 2

Partners contribute money, other property, or services in return for their ownership stake in this entity:

Answer 2

Partnership

Question 3

Is gain or loss generally recognized on contribution of property to a partnership in return for a partnership interest?

Answer 3

No

Question 4

A taxpayer contributes land in exchange for partnership interest. The land has an adjusted basis of 30,000 and FMV of 50,000 at the time of transfer. Determine the amount of gain or loss recognized by the taxpayer.

Answer 4

0

Question 5

Partnership interest can consist of:

Answer 5

Capital interest, profit interest, or both

Question 6

A right to share in the net assets of the partnership when it liquidates:
A right to share in the future profits or losses of the partnership:

Answer 6

Capital interest
Profits interest

Question 7

When a partner receives a profits interest in exchange for services provided, what happens?

Answer 7

The partner does not recognize any compensation as ordinary income

Question 8

A taxpayer receives 20% partnership profits interest in exchange for services provided. On the da he is admitted to the partnership, the partnerships assets have a basis of 20,000 and liquidation value of 80,000. Determine the amount of income, gain or loss recognized by the taxpayer.

Answer 8

0

Question 9

One exception to the nonrecognition of gain is for capital interest acquired for services provided. What amount is included in taxable ordinary income?

Answer 9

The liquidation value of the capital interest

Question 10

A taxpayer receives a 20% partnership capital interest in exchange for services provided. On the day h is admitted to the partnership, the partnerships assets have a basis of 20,000 and a liquidation value of 80,000. Determine the amount of income, gain, or loss recognized by the taxpayer.

Answer 10

80,000 liquidation value X 20% = 16,000 ordinary income

Question 11

Another exception to the nonrecognition of gain is for property subject to excess liability. What amount is treated as a taxable gain to the partner?

Answer 11

The excess of the liabilities assumed by the other artery over the contributed basis

Question 12

What is the partners basis in partnership interest called?
What is the partnerships basis in the assets distributed called?

Answer 12

Outside basis
Inside basis

Question 13

How do you calculate a partners initial basis in partnership interest?

Answer 13

Cash contributed
+ adj. basis of property contributed
+ services provided
- liabilities transferred to partnership assumed by other partners
+ partners share of partnership liabilities that were already in the partnership
= partners initial basis in partnership interest

Question 14

This type of debt, the creditor can go after the partners personal assets.
This type of debt, the creditor only has the right to take the secured property, not the personal assets of partners or LLC members.

Answer 14

Recourse debt
Non recourse debt

Question 15

What type of debt is only allocated to general partners?
What type of debt is allocated to both general and limited partners?

Answer 15

Recourse debt
No recourse debt

Question 16

If the subsequent decrease in the partners individual liability exceeds his or her partnership basis, the excess amount is treated how?

Answer 16

Like a taxable gain to the partner to increase the basis back to 0

Question 17

Becker and peter admit Tim to their partnership as a one-third partner. Tim contributes a building that is worth 500,000 but has a basis of 100,000. There is a mortgage of 225,000 on the building, assumed by the partnership. Determine Tim’s basis or interest and if there is any taxable gain.

Answer 17

225,000 X 2/3 = 150,000 liabilities assumed by others
100,000 - 150,000 = (50,000) net basis

50,000 taxable gain, 0 basis

Question 18

If the property contributed was previously a capital asset or section 1231 asset in the hands of the partnership, what is the partners holding period?

If the property is an ordinary income asset (inventory), what is the holding period?

Answer 18

The old holding period of the property contributed
The date the property is contributed

Question 19

A partners basis in his or her partnership interest is adjusted each year for the partners share of the following items. Of these items, which increase the basis and which decrease the basis?

Answer 19

Increase: additional contributions, income and gain items, and increases in partnership debt
Decrease: distributions, loss and deduction items, and decreases in partnership debt

Question 20

When a partner contributes property wit a FMV that is higher or lower than the property’s adjusted basis, what happens?

Answer 20

A built-in gain or loss on the subsequent sale of the property that is allocated to the partner

Question 21

Joan contributed property with an adjusted basis of 100,000 and a FMV of 150,000 to the partnership in exchange for 20% partnership interest. In year 3, the partnership sold the property to an unrelated party for 180,000. Calculate the amount of gain recognized by Joan in year 1 & 3.

Answer 21

Year 1 = 0 gain

180,000 - 100,000 = 80,000
150,000 - 100,000 = 50,000
80,000 - 50,000 = 30,000 X 20% = 6,000

50,000 + 6,000 = 56,000 year 3 gain

Question 22

In year 1, Jeff contributes the following items in exchange for 1/3 interest in KNC partnership:
10,000 cash
Building w a FMV of 300,000 and adjusted basis of 100,000 subject to a liability of 90,000.

In year 2, Jeff contributes another building w a FMV of 600,000 and an adjusted basis of 300,000.
The partnership had 150,000 of net income in year 2.
Determine Jeff’s initial outside basis in year 1 and year 2. Determine the partnerships inside basis in year 1 and year 2.

Answer 22

Jeff:
90,000 X 2/3 = 60,000
10,000 + 100,000 - 60,000 = 50,00 yr 1 basis

300,000 + (150,000 X 1/3) = 350,000 + 50,000 yr 1 basis = 400,000 year 2 basis

KNC: 100,000 yr 1 basis
300,000 + 100,000 yr 1 basis = 400,000 year 2 basis

Question 23

When does a partnership terminate?

Answer 23

When operations cease
Or
There are fewer than 2 partners

Question 24

Are related party losses and related party gains allowed?

Answer 24

Losses - no
Gain - yes as ordinary income

Question 25

What must a partner include on an individual tax return?

Answer 25

Their share of ordinary business income or loss and each separately stated item of income, gain, loss and deduction

Question 26

What tax consequence and impact on the basis does income and withdrawals have to partners?

Answer 26

Income : taxable and an increase to basis
Withdrawal : nontaxable and decrease to basis

Question 27

Reasonable compensation paid to a partner for services provided or use of capital without regard to the partner’s profit or loss sharing ratio:

Answer 27

Guaranteed payments

Question 28

How are guaranteed payments treated to the partner and to the partnership?

Answer 28

Partner: taxable income included on schedule k-1
Partnership: tax deduction

Question 29

How are retirement payments to partners treated to the partner and to the partnership?

Answer 29

Partner: ordinary income
Partnership: tax deduction

Question 30

Who decides tax elections such as accounting methods, tax year, depreciation methods, etc., the partner or partnership?

Answer 30

The partnership

Question 31

Organizational expenditures include:
Start up costs include:

Answer 31

Legal and accounting services

Training, advertising, and testing costs

Question 32

What amount can the partnership elect to deduct for organizational expenses? What amount of startup costs?

Answer 32

Organizational: 5,000 and excess amortized over 180 months
Startup: 5,000 and excess amortized over 180 months

Question 33

What four hurdles must a partner in a partnership clear in order to deduct a loss?

Answer 33

Tax basis limitation
At risk limitation
Passive activity loss limitation
Excess business loss limiation

Question 34

Becker and Connor formed a partnership in year 1 with each contributing property with 30,000 and 6,000 basis respectfully. The partners share profits and losses equally. Each partner withdrew 3,000 and the partnerships ordinary business loss was 8,000. Determine how much of the ordinary business loss each partner can flow through to their individual income tax returns for deduction.

Answer 34

30,000 - 3,000 - 4,000 = 23,000 becker’s basis in partnership interest at YE

6,000 - 3,000 - 4,000 = -1,000 connor’s suspended loss and 0 basis in partnership interest at YE

Question 35

Based on the following types of partnership debt:
Recourse debt
Qualified non recourse financing
Other non recourse debt

Determine if it is included in the partner’s tax basis and/or at-risk basis.

Answer 35

Recourse: yes and yes
Qualified non recourse financing: yes and yes
Other non recourse debt: yes and no

Question 36

ABC partnership has 3 equal partners. A and B are general partners, and C is a limited partner. In the current year, ABC partnership borrowed 60,000 in qualified non recourse financing debt, 30,000 in other non recourse debt, and 20,000 in recourse debt.

Calculate the increase in each partners tax basis in their partnership interest and their at risk basis for the partnership debt.

Answer 36

20,000 recourse / 2 general partners = 10,000
30,000 other non recourse / 3 partners = 10,000
60,000 qualified nonrecourse / 3 partners = 20,000

Partners A & B: 10+10+20= 40,000
Partner C: 10+20= 30,000

Question 37

What is the maximum net business loss that may be deducted for partners?

Answer 37

$540,000 MFJ
$270,000 for all others

Question 38

Rachel created a partnership. She had initial cash contribution of $20,000. Additionally she was allocated $5,000 of recourse debt that she had personally guaranteed and $8,000 of non recourse debt. In the first year, she was allocated $35,000 of ordinary business income from the LLC.

Calculate Rachel’s tax basis and at-risk amount in the LLC. How much of the loss from the LLC can she deduct on her individual income tax return?

Answer 38

20,000 cash + 5,000 recourse + 8,000 non recourse = 33,000 tax basis
20,000 cash + 5,000 recourse = 25,000 at risk basis

35,000 loss - 25,000 at risk basis = 10,000 loss suspended and 25,000 can be deducted

Question 39

Rachel created a partnership to sell rental real estate. Rachel is not an active participant in the business. Rachel had an initial cash contribution of 100,000. She was allocated 20,000 recourse deb and 30,000 nonrecourse debt. In the first year she was allocated 50,000 ordinary business loss.

Calculate Rachel’s tax basis and at risk amount in the LLC. Calculate the loss from the LLC she can deduct.

Answer 39

100,000 + 20,000 + 30,000 = 150,000 tax basis
100,000 + 20,000 = 120,000 at risk amount

50,000 loss is suspended because it is passive and she has no passive income to offset it

Question 40

If a partner receives a cash distribution that is greater than the partners basis in his/her partnership interest, what happens?

Answer 40

The partner recognizes a capital gain for the excess

Question 41

Plinths basis in his partnership interest was 30,000. He received a non-liquidating operating distribution of 24,000 cash plus a parcel of land with a FMV of 12,000 and partnership basis of 9,000.
Determine olinto’s basis in the land distributed and his partnership interest immediately after the distribution.

Answer 41

30,000 basis - 24,000 distribution = 6,000 - 9,000 = -3,000
Since nonliquidating distributions cannot go below 0, Olinto’s basis in the partnership is 0 and his basis in the land is 6,000.

Question 42

When multiple assets are distributed to a partner and the partners basis in his/her partnership interest is less than the adjusted basis of the assets distributed, how is the partners remaining basis in the partnership interest allocated?

Answer 42

First to cash
Then to inventory and unrealized receivables (hot assets)
Then to other property

Question 43

Olinto’s basis in his partnership interest was 30,000. He received a nonliquidating operating distribution consisting of the following assets:
Cash - 24,000
Inventory - 5,000
Land - 9,000
Determine Olinto’s basis in the property distributed and his basis in the partnership interest after the distribution.

Answer 43

30,000 - 24,000 - 5,000 = 1,000

Basis in cash = 24,000
Basis in inventory = 5,000
Basis in land = 1,000
Basis in partnership = 0

Question 44

This type of entity is a separate legal entity from its owners. Members of this entity type are not personally liable for the obligations of the business.

Answer 44

Limited liability company (LLC)

Question 45

An LLC can be treated as one of the following entities for tax purposes:

Answer 45

Partnership
Corporation
Or sole proprietorship

Question 46

What are three ways a partner my liquidate a partnership interest?

Answer 46

Complete withdrawal
Sale of partnership interest
Retirement or death

Question 47

During a complete withdrawal, the partner general would “zero out to get out”, however, what is the exception that would create a gain or loss?

Answer 47

Gain: if money received exceeds the partners basis in the partnership interest
Loss: if money received is less than the partners basis in the partnership interest

Question 48

Tag’s basis in the partnership interest was $24,000. He received liquidating distributions of $5,000 cash and real estate with a FMV of 25,000 and adjusted basis to the partnership of 10,000.
Determine tag’s basis in the in the real estate and any gain/loss.

Answer 48

24,000 basis - 5,000 = 19,000 basis in real estate
No gain/loss

Question 49

Tag’s basis in the partnership interest was $24,000. He received liquidating distributions of $25,000 cash and real estate with a FMV of 25,000 and adjusted basis to the partnership of 10,000.
Determine tag’s basis in the in the real estate and any gain/loss.

Answer 49

24,000 basis - 25,000 = 1,000 gain
0 basis in real estate

Question 50

Tag’s basis in the partnership interest was $24,000. He received liquidating distributions of $20,000 cash. Determine any gain/loss recognized by tag.

Answer 50

24,000 basis - 20,000 = 4,000 loss

Question 51

Tag’s basis in the partnership interest was $24,000. He received liquidating distributions of $5,000 cash and inventory with a FMV of 25,000 and adjusted basis to the partnership of 10,000.
Determine tag’s basis in the in inventory and any gain/loss.

Answer 51

24,000 basis - 5,000 cash = 19,000 - 10,000 inventory basis = 9,000 loss

Question 52

Hearty’s basis in his partnership was $229,000. He received a liquidating distribution consisting of the following assets:
Cash - 4,000 basis / 4,000 FMV
Inventory - 10,000 / 15,000 FMV
Land lot A - 200,000 / 150,000 FMV
Land lot B - 100,000 / 300,000 FMV
Total - 314,000
Detainee hearty’s basis in the property distributed and his basis in the partnership interest after the distributions.

Answer 52

229,000 basis - 314,000 = -85,000 balance to be written down
150 lot A + 100 lot B = 250,000
150/250 = 60% X 35,000 = 21,000
100/250 = 40% X 35,000 = 14,000
85,000 - 50,000 FMV of lot A = 35,000
Basis in partnership = 0
Basis in lot A = 150 - 21 = 129,000
Basis in lot B = 100 - 14 = 86,000

Question 53

What is the basis of property received and the reduction of his in partnership interest for non-liquidating and liquidating distributions?

Answer 53

Non-Liquidation: adjusted basis of property / adjusted basis of property (stop at zero)
Liquidating: partnership interest / must zero out

Question 54

The parter has a capital gain or loss when transferring a partnership interest because:

Answer 54

A partnership interest is a capital asset to the partner

Question 55

Kristi sold her interest in the partnership to a new partner, john for 15,000 cash. John agreed to assume kristi’s 5,000 share in partnership liabilities. Determine the amount realized on the sale of kristi’s partnership interest.

Answer 55

15,000 + 5,000 = 20,000 realized

Question 56

Parter A, a 20% partner, sells their entire partnership interest to new partner B, on march 31st. The partnership reported 80,000 partnership income for the tax year. Calculate A and B’s shares of partnership income for the year.

Answer 56

(80,000 X 90/365) X 20% = 3,945 partner A
(80,000 X 275/365) X 20% = 12,055 partner B

Question 57

Oscar purchased Bernice’s 25% interest in the partnership for $500,000. At the time of sale, te partnership made a 754 election to adjust the basis of the partnership asset. Immediately before the sale, the inside basis in the partnership asset was 1,200,000 and the FMV was 2,000,000. Calcualte the basis adjustment required under section 743(b).

Answer 57

1,200,000 X 1/3 = 300,000
500,000 - 300,000 = 200,000 adjustement