CH 10 - Quiz Flashcards
(1) What is a partnership agreement?
(2) What types of provisions does it include?
A partnership agreement is an agreement among the partners regarding:
(A) the rights and obligations of the partners,
(B) Allocation of partnership income, deductions,
(C) Allocation and distribution of partnership cash flows,
(D) requirements for capital contributions,
(E) conditions under which the partnership is terminated,
(F) and other matters
What is the difference between a general partnership and a limited liability company?
(1) In a general partnership (GP), each owner is a general partner and may participate in managing the entity; however, these partners also have unlimited liability for the entity’s debts.
(2) In a limited liability company (LLC), each member may also participate in management; however, absent a personal guarantee, the members have no liability for the entity’s debts
Which is preferred for (most people) a General Partnership or LLC?
LLCs should be the entity form of choice for
most operating partnerships.
Describe how a partnership reports its income for tax purposes.
A partnership is not a taxpaying entity; however, it still must file a tax return.
The partnership reports its income and expenses on Form 1065.
Partnership income consists of income from operations and separately stated income and expenses
If a partner contributes depreciable or amortizable property to the partnership, how is the basis of those properties recovered?
Partnership “steps into shoes” of contributing
partner (continues same depreciation or amortization schedule used by partner).
When can a partnership use the cash method of accounting?
A partnership generally can use the cash method if it is engaged in the business of farming or if it does not have any partners that are C corporations (other than personal service corporations).
In addition, if the partnership has a partner that is a C corporation, it can still use the cash method if
the partnership has not had more than $26,000,000 of average annual gross receipts in the three year period prior to the current tax year.
(1) What is a Guaranteed Payment?
(2) Where is the Guaranteed Payment recorded?
(3) Can the partnership deduct “Guarantee Payments”?
(1) A guaranteed payment is an amount paid to a partner for the performance of services or for the partnership’s use of the partner’s capital; these payments are conceptually similar to the salary or interest payments made by other entities.
(2) The partner’s Schedule K–1 will indicate whether a guaranteed payment is for services or capital.
(3) Guaranteed payments generally are deductible by the partnership and can result in a loss to the entity.
What is the purpose of the qualified business income deduction under § 199A?
The qualified business income (QBI) deduction under § 199A is designed to yield a lower effective tax rate on QBI to non-corporate owners of certain pass-through operating businesses
How does a partner calculate a QBI deduction if he is a part of more than one qualified business?
The partner calculates the QBI amount for each trade or business.
This amount is 20% of qualified income from qualified businesses.
This amount is limited to the greater of (1) 50% of W–2 wages paid by the business or
(2) 25% of W–2 wages plus 2.5% of the unadjusted basis of the partnership’s depreciable property.
The partner’s deduction is the “combined QBI amount,” which is the sum of the QBI amounts from each trade or business.
The deduction is limited, in general, to 20% of the partner’s taxable income excluding capital gains.
Discuss the adjustments that must be made to a partner’s basis in the partnership interest.
Under § 722, a partner’s initial basis is determined by reference to the amount of money and the basis of other property contributed to the partnership.
This basis is increased by any gain recognized under § 721(b) and the partner’s share of any partnership liabilities.
Basis is decreased by any partner liabilities assumed by the partnership.
What is a partner’s capital account?
A partner’s capital account is a mechanical determination of the partner’s financial interest in the partnership’s net assets (assets less liabilities).
The capital account reflects contributions and distributions of cash or other property to or from the
partner. In addition, it accumulates the partner’s share of increases and decreases from operations,
including amounts that are otherwise tax-exempt or nondeductible.
Describe the limitations that apply to the deductibility of a loss from a partnership.
Losses may be limited by the partner’s basis in the partnership
When is partnership income subject to self-employment tax?
An individual partner who is a general partner must pay self-employment tax on his or her distributive share of partnership income.
——————————BACKGROUND——————————
Enercio contributes $100,000 in exchange for a 40% interest in the calendar year ABC LLC, which is taxed as a partnership.
This year, the LLC generates $80,000 of ordinary taxable income and has no separately stated income or expenses.
Enercio withdrew $10,000 from the partnership during the year.
——————————QUESTION———————————
(1) Enercio is taxed on what amount of ABC’s income?
(2) On how much of the $10,000 distribution will Enercio be taxed?
(1) $32k
(2) None. The $10,000 distribution is not separately taxed because the distribution is less than Enercio’s basis in the partnership interest before the distribution.
——————————BACKGROUND——————————
Henrietta transfers cash of $75,000 and equipment with a fair market value of $25,000 (basis to her as a sole proprietor, $10,000) in exchange for a 40% profit and loss interest worth $100,000.
- —————————–QUESTION————————————
1. How much are Henrietta’s realized and recognized gains?
- What is the amount of Henrietta’s basis in her partnership interest?
- What is the partnership’s basis in the contributed equipment?
- Recognized = 0; Realized = $15k
- Substituted basis of $85k
- Carryover basis of $10k
