Direct Participation Programs Flashcards
Entity that passes all income and expenses directly to the owners, but is not taxed itself. Passive losses can only be offset by passive income, not earned income.
Direct Participation Program (DPP)
What are the different types of DPP’s?
- General Partnership
- Limited Partnership
- Subchapter S Corporation
- LLC
DPP where all partners are fully liable for all activities and obligations of the DPP.
General Partnership
DPP that has a partner who is fully liable and another partner who has limited liability. This DPP is only liable to the amount invested and to the extent of any recourse financing. One of the partners is silent and does not make management decisions. Benefits of this setup are limited liability and avoidance of double taxation.
Limited Partnership
DPP that is a closely held corporation and all income and expenses pass through to shareholders. It has some limited liability characteristics. Maximum pemissible number of shareholders is 100.
Subchapter S Corporation
DPP that avoids taxation by passing income and expenses through to the owners. Owners are exposed to limited liability.
Limited Liability Company (LLC)
What are the corporate characteristics that a DPP must avoid in order to maintain its unique status?
- Group of Associates
- Gathered to achieve a profit
- Centralized management
- Freely transferable interest
- Limited liability
- Continuity of life
As a manager of the partnership, this person has fiduciary responsibility to act in the best interest of other partners. Must avoid activities that present a conflict of interest which includes borrowing from partnership and competing with parthernship. This person cannot sell personally owned assets to the partnership.
General Partner
As owner of the partnership, this person has the right to inspect the books and can sue other partner if they willfully mismanage partnership assets or breaches agreement.
Limited Partner
Form used for limited partnership informational tax filing where partnerships determine each investor’s reportable share of gains and losses
K-1
What are PIGs and PALS and how do they work?
PIG - Passive Income Generator
PAL - Passive activity loss
Tax code says PALs can be offset by PIGs, not ordinary income
Accounting methods whereby enterprises recognize the cost of capital assets against their revenues. The enterprise purchases an asset, then recognizes a portion of that purchase price in each year of the asset’s life.
Cost Recovery System
Cost recovery method that allows enterprise to write off large portions of asset’s cost during early years of asset’s life. This is advantageous due to the time value of money. In addition, this method allows owners to depreciate the full cost of the asset, leaving no residual value, or even allow for the write off of more than the cost of the asset.
Accelerated Cost Recovery Method (ACRS)
Risk when a partnership sells a piece of equipment on which it has used an ACRS, which lowers the book value. If the asset is sold for fair market value, the partnership experiences a capital gain and is taxed on it. The prior tax advantage is cancelled due to capital gain tax.
IRS Recapture
Deprectiation used for real property improvements such as office towers, apartment complexes, or shopping centers. An equal amount of the asset’s cost is expensed during each year of the asset’s life, which differs from ACRS, where larger expenses are taken during the early years of the asset’s life.
Straight Line Depreciation
Cost recovery system taken on irreplaceable natural resources, such as oil, natural gas and coal. The different types are percentage, and cost. Percentage benefits small oil and gas.
Depletion
What affects an LP’s cost basis?
- Established by initial investment
- Recourse debt is added to cost basis
- Depreciation and depletion reduce cost basis
