Ch 4: Partnerships

Question 1

What is the initial basis of a partner’s interest?

Answer 1

Cash, Amount contributed

+ Property, Adjusted Basis (NBV)

(% (Liabilities) (Liabilities assumed by other partners)

+ Services (Fair market value (and taxable to partner))

+ % Liabilities (Liabilities assumed by incoming partner)

Beginning Capital Account

Question 2

What is the basis of contributed property to the partnership?

Answer 2

The basis of contributed property to the partnership is the partner’s basis increased by any gain recognized by the partner on the contribution.

Question 3

State the holding period for a partner’s interest.

Answer 3

The holding period for a partner’s interest is equal to the holding period of the property contributed if the property were a capital asset or a Section 1231 asset in the hand of the partner( i.e. rollerover holding period).

If the property were an ordinary income asset (inventory), the holding period starts on the date of contribution to the partnership.

Question 4

What is the formula for a partner’s basis in its partnership interest?

Answer 4

+Capital account

+ Partner’s share of partnership recourse liabilities

Basis

Question 5

Although a partnerhsip is not subject to income taxes, it must file a partnership tax return. Which form is this?

Answer 5

Form 1065

Question 6

When does a partnership terminate, for tax purposes?

Answer 6

1) When operations cease
2) When 50% or more of the total interest (capital and profits) in the partnership is sold or exchanged within a 12 month period
3) When there are fewer than two partners (the partnership becomes a sole proprietorship)

Question 7

Tax losses generated by a p-ship are deductible by the partners and can be used to offset ordinary income. For the partner to deduct the losses, the losses must clear what hurdles?

Answer 7

1. Losses Limited to Tax Basis
   
   • limited to p’s adj basis, which is increased by any p-ship liabilities for which the p is personally liable or additional capital contributions to the p-ship
2. Losses Limited to At-risk Amount
   
   • calculated similar to p’s tax basis, but does not include certain nonrecourse liabilities
3. Passive Loss Limitations
   
   • limit the ability of ps involved in passive activities from using ordinary losses from the passive activity to reduce ordinnary taxable income
   • passive activities: rental or real estate or nonactive participation in a p-ship

Note: any unused loss resulting from tax basis limitations can be carried forward and used in a future year when basis becomes available.

Question 8

How are partnership losses treated at the partner level?

Answer 8

1) A partner reports losses on the partner’s income tax return to the extent the partner has basis.
2) A partner’s loss in excess of the partner’s basis, and any loss not allowed on account of the “at risk” rules or the “passive activity loss” rules, will be a carry forward indefinitely (and remain suspended until basis becomes available or the partner disposes of the entire partnership interest).

Question 9

What is the limit on the deductibility of a partnership loss to a partner?

Answer 9

1) Partnership loss deduction to a partner is limited to the partner’s adjusted basis in the partnership interest (called the “at risk’ provision).
2) Any unused loss can be carried forward and used in a future year when basis becomes available.
3) The partner also may be subject to passive activity loss limitations.

Question 10

How to treat payments received by a retired partner (that are not in liquidation)

Answer 10

1. ordinary income to the recipient, and
2. Deductions to the p-ship

Question 11

What is the treatment of guaranteed payments to a partner?

Answer 11

1) A guaranteed payment is a deduction on the partnership tax return, and the payment flows through to the partners as part of ordinary business expenses on the K-1.
2) Then, because the partner is not considered an employee, the payment must be included as self-employment income on the partner’s return.

Question 12

How are the partnership income and losses reported? Part 1

Answer 12

1) Net business income or loss
2) Guaranteed payments to partners
3) Net “active” rental income or loss
4) Net “passive” rental income or loss
5) Interest Income
6) Dividend income
7) Capital gains and losses.
8) Charitable contributions
9) Section 179 “bonus depreciation”
10) Investment interest expense
11) Partner’s health insurance premiums
12) Retirement plan contributions (Keogh plan)
13) Tax credits. (All Schedule K-1)

Question 13

List the 3 ways a partner may liquidate a partnership interest

Answer 13

1. complete withdrawl
2. sale of p-ship interest
3. retirement or death

Question 14

When a partnership is terminated, what basis does the partner assume for distributed property?

Answer 14

1) Upon termination of a partnership, a partner’s basis in the property distributed from the partnership is equal to the partner’s basis in the partnership interest reduced by any money received.
2) The holding period of the property includes the partnership’s holding period.