Chapter 8: Direct Participation Programs Flashcards
______ are entities that pass all income and expenses directly to the owners. Consequently, the ______ itself is not taxed.
Direct Participation Programs (DPPs)
Since the Tax Reform Act of 1986, ______ losses generated by DPPs can only be offset against ______ income. ______ losses may NOT offset ______ income.
- Passive
- Passive
- Passive
- Earned
When investors own stock, they experience ______. First, the corporation is taxed on its earnings. When those earnings are then distributed to the shares, the shareholders are taxed a second time. DPPs don’t experience this ______.
Double Taxation
No more than ______ of the money raised can be used for start-up costs, such as distribution, attorney fees, accounting fees, and filing fees.
15%
In a(n) ______, all partners are general partners, and are fully liable for all activities and obligations of the partnership.
General Partnership [DPP]
A(n) ______ has at least one general partner (GP) who is fully liable and at least one limited partner (LP) who has limited liability.
Limited Partnership [DPP]
The ______ is chosen based on their expertise in the field in which they are investing.
General Partner
______ are only liable to the amount they’ve invested and to the extent of any recourse financing to which they have agreed.
Limited Partners
______ are silent partners and can make no management decisions. If the ______ has any management input, the ______ has changed status, and becomes a(n) ______ with full liability.
- Limited Partners
- Limited Partner
- Limiter Partner
- General Partner
A limited partnership gives the LPs two important advantages: ______ and avoidance of ______ on distributions from the limited partnership.
- Limited Liability
2. Double Taxation
A(n) ______ is a small company, usually family-owned and operated. It is a closely held corporation and all income and expenses pass through to the individual shareholders.
Subchapter S Corporation (Sub S) [DPP]
Because a(n) ______ is a corporation, it has some limited liability characteristics for the investors.
Subchapter S Corporation (Sub S) [DPP]
The maximum permissible number of shareholders in a Sub S is ______.
100
______ also function as conduits; the entity avoids taxation by passing income and expenses through to the owners. A(n) ______ also exposes the owners to limited liability.
Limited Liability Company (LLC) [DPP]
______ provide venture capital to small companies and allow investment from a larger pool of investors.
Business Development Companies (BDCs)
______ allow anyone to participate in small start-up businesses.
Business Development Companies (BDCs)
A(n) ______ is not considered a DPP, or pass-through vehicle. Though ______ must pass through 90% of their investment income, they do not pass through losses. A(n) ______ owner’s liability is limited to the amount invested.
Real Estate Investment Trust (REIT)
If the IRS concludes that a limited partnership’s primary goal is ______, the IRS will deem the limited partnership to be abusive. The IRS will consequently assess back taxes and penalties, and might even prosecute for fraud.
Tax Advantages
Direct participation programs themselves do not pay ______. All gains and losses pass through to the ______. Therefore, all ______ are paid by the ______.
- Taxes
- Individual Investors
- Taxes
- Investors
DPP investors are at a higher risk for ______ because the IRS regularly verifies the authenticity of DPPs as pass through vehicles.
IRS Audit
Corporations share 6 common characteristics shown below. To maintain its unique status, a DPP must avoid at least ______ of the six.
- A group of ______: People must be involved whether it’s a corporation or partnership, so this is a difficult corporate characteristic to avoid.
- Gathered to achieve a(n) ______: The entity’s primary purpose must be economic viability. This characteristic cannot be bypassed.
- Centralized ______: A corporation has a management team, typically led by the CEO and board of directors. In a limited partnership, the general partner is this centralized management. This necessity for centralized management cannot be avoided.
- Freely transferable ______: Unlike a corporation’s stock, which freely trades in the secondary market, limited partnership interests are difficult, if not impossible, to transfer. There is a very limited secondary market for limited partnership interests. Also, the general partner must approve the new LP if a partnership interest is sold. Therefore, this characteristic is easy to avoid.
- Limited ______: In a corporation, all shareholders have limited liability. In a partnership, this characteristic is easily avoided. The GP has unlimited liability for all partnership activities and debt. The GP is said to be jointly and severally liable.
- Continuity of ______: Corporations are ongoing concerns. They can run in perpetuity, generation after generation. However, a limited partnership easily avoids this by setting a future liquidation date. On this date, operations cease, all assets are sold, and each owner is given their share. Also, the partnership frequently has a policy of automatic liquidation upon the GP’s death, illness or removal.
- Two
- Associates
- Profit
- Management
- Interest
- Liability
- Life
As manager of the partnership, the ______ has a fiduciary responsibility to act in the best interest of the ______. Therefore, the ______ must avoid activities which present a conflict of interest.
- General Partner (GP)
- Limited Partner (LP)
- General Partner (GP)
The ______ has a fiduciary responsibly and may not borrow from or compete with the partnership (though the ______ may be paid not to compete). Also, the ______ may not sell personally owned assets to the partnership.
General Partner (GP)
As owners of the partnership, the ______ have the right to regularly inspect the books. The ______ may also sue the ______ if the ______ willfully mismanages partnership assets or breaches the partnership agreement.
- Limited Partners (LPs)
- Limited Partners (LPs)
- General Partner (GP)
- General Partner (GP)
There are many risks associated with investing in a limited partnership:
- Higher ______ risk.
- No ______ that the partnership will meet its objectives.
- Interests are very ______.
- Investor might lose entire ______.
- The GP is the sponsor of numerous programs at the same time, creating potential ______.
- IRS Audit
- Guarantees
- Illiquid
- Investment
- Conflicts of Interest
Limited partnerships do file a(n) ______ with the IRS. From their informational filing, partnerships determine each investor’s reportable share of gains and losses and provide this information to each limited partner on a(n) ______ for tax filing.
- Informational Tax Form
2. Form K-1
Income which flows to the LPs through limited partnerships is classified as ______, or ______.
- Passive Income
2. Passive Income Generators (PIGs)
Losses which flow through to LPs are classified as ______, or ______.
- Passive Losses
2. Passive Activity Losses (PALs)
Under the current tax code, ______ may only be offset against ______. ______ may NOT be offset against ordinary income.
- Passive Activity Losses (PALs)
- Passive Income Generators (PIGs)
- Passive Activity Losses (PALs)
______ are accounting methods whereby enterprises recognize the cost of capital assets against their revenues. The enterprise first purchases a major asset, such as computer equipment or machinery, and then recognizes a portion of that purchase price in each year of the asset’s life.
Cost Recovery Systems
______ is not a cash flow item. It is simply an accounting system to systematically spread an asset’s purchase price over its lifespan.
Depreciation
______ (or ______, ______) allow the enterprise to write off large portions of the asset’s cost during early years of the asset’s life. This is advantageous to the entity due to the time value of money.
- Accelerated Cost Recovery Methods
- Systems
- ACRSs
These ______ methods typically allow the owner to depreciate the full cost of the asset, leaving no residual value. Certain ______ methods even allow for the write off of more than the cost of the asset.
Accelerated Cost Recovery Systems (ACRS)
The process of selling an asset that has been depreciated using ACRS and paying a capital gain on the difference being book value (or cost basis) and market value is known as “______”.
Recapture
Limited partnerships also ______ improvements to land, such as buildings like office towers, apartment complexes, or shopping centers. Though these improvements are ______, it is important to remember that the land itself is not.
- Depreciate
2. Depreciated
Depreciation reduces the investors’ ______.
Cost Basis
Depreciation for real property improvements is usually done on a(n) ______. Under ______ depreciation, an equal amount of the asset’s cost is expensed during each year of the asset’s life.
- Straight Line Basis
2. Straight Line
Another type of cost recovery system is ______, which is taken on irreplaceable natural resources.
Depletion
There are two types of resource depletion: ______ depletion and ______ depletion.
- Percentage
2. Cost