Chapter 4: Partnership Taxation Flashcards
What does outside basis and inside basis mean for a partnership?
Outside basis is the partner’s basis in the partnership
Inside basis is the partnership’s basis in its assets
What is the equation to calculate partner basis?
How is a partner’s outside and inside basis increased or decreased?
When are cash distributions and contributed assets considered a gain?
Cash distributions are considered a gain when they are in excess of basis
Contributed assets subject to higher liabilities result in a gain
- If asset distribution exceeds basis, the basis of the distributed asset will be adjusted
What is a recourse liability and who is is allocated to?
A liability where the debotor bears an economic risk of loss
Allocated only to general partners
What is a non-recourse liability and how is it allocated?
It is a liability where the debtor does NOT bear an economic risk of loss
Both limited and general partners are allocated based on amount of profit interest in the partnership. If no profit interest, then use capital interest.
How is the tax year for a partnership determined?
The tax year for a partnership is generally the same tax year as the partners (or the majority of the partnership interests)
If no majority, then use the tax year of principal partners (partners who own more than 5%)
If no principal partners or their tax year is not the same, use the year with the least aggregate deferral
What does least aggregate deferral mean when determining the tax year for a partnership?
It means the year that defers the least amount of income for the least amount of time
Determined by adding together for each year (the deferral period per partner x partner’s ownership %)
How are transactions treated between a majority partner and the partnership?
Losses from sales of property are not allowed (related party transaction)
Gains from sale of property is ordinary income
How are distributions to a retiring partner treated?
Distributions to a retiring partner (liquidating distributions) are treated as income by the retired partner.
Basis is reduced to zero.
If more cash than basis is distributed, it results in a gain. If less cash than basis is distributed, it results in a loss.
Property distributed reduces the basis to zero no matter what the original basis was.
How are nonliquidating distributions treated?
Distributions to a partner reduce the partner’s basis.
A cash distribution that causes the partner’s basis to go negative is treated as a gain to the partner
A property distribution over basis just makes the basis go to zero
What is the equation to figure out the gain/loss on sale of a partnership interest to a third party?
Cash/property received + relief from debt - partner’s (outside) basis = gain/loss
What happens if a partner sells their interest and the partnership as unrealized ordinary income assets (inventory and accounts receivable)?
If the partnership has these assets (“hot assets”) then part of the gain on sale of interest must be reported as ordinary income to the extent of unrealized ordinary income assets.
The rest of the gain is considered a capital gain.
