Direct Participation Programs 6% Flashcards
How did the Tax Reform Act of 1986 affect DPPs?
-it stopped the tax advantage of being able to use your losses against earned income
What is a direct participation program?
- owners directly participate in the income and expenses of the enterprise
- this avoids the double taxation of the corporation becoming taxed and the investor being taxed
Types of DPPs
- General Partnership - all partners fully liable
- Limited Partnership - has at least one general partner (GP)
- at least one limited partner (LP) (limted to
amount invested, silent partners - Subchapter S - max shareholders is 100
- LLC -
What IRS criteria must a DPP meet?
Corporations share 6 common characteristics. To maintain its unique status, a DPP Must avoid at least two of the six:
- A group of associates: People must be involved, so hard to avoid this one
- Gathered to achieve a profit: Primary purpose must be economic viability, this characteristic cannot be bypassed
- Centralized Management: cannot be avoided
- Freely Transferable asset: easy to avoid
- Limited Liability: easy to avoid, as the GP in a partnership is wholly liable
- Continuity of Life: easy to avoid as the corp sets a future liquidation date.
GP’s Fiduciary Responsibilities
- borrowing from the partnership
- competing with the partnership
- may not sell personally owned assets to the partnership
LP’s rights
- inspect the books
2. sue the GP if the GO is willfully mismanaging or breaks partnership agreement
DPP Taxation
- File a K1
- PIGs - Passive income generators
- PALs - passive activity losses
- PALs may only be offset by PIGs
Depretiation
- ACRS - equipment
- Recapture - when asset is sold, maybe for more than book value, may result in cap gains
- straight line - buildings
Depletion
- oil, natural gas, coal reserves are depleted
- percentage and cost depletion
- percentage benefits small oil and gas producers
Recourse Debt
- think about the usbank loan on gjs
- would be due if gjs sold
Crossover point
- where the partnership experiences taxable income greater than cash flow
- earlier years depreciation is larger than cash flow, typically
Phantom Income
when the investor is taxed on income higher than cash flow
Distribution of Limited Partnership, shares, etc.
- Max sales charge of 10%,
- 1/2% charge for due diligence expense
- may recover printing, filing fees
LP Status change through a roll up
- frequently benefits the GP of the LP, must be disclosed to the LPs
- can form MLP
- master limited partnership
- freely transferable, either on exchange or OTC
- or possible a corporation
- b/d fee for structuring a roll up is limited to 2%
“Trade Ticket” for an LP purchase
- called the subscription agreement
- contains a detailed financial questionnaire the investor must complete and sign
- GP reviews before investor is accepted into LP
Required Docs
- Cert of LP with SOS
- Subscription agreement signed by GP
Public and Private Offerings
- prospectus - public
- offering memorandum - private
- most sold through Reg D private placements
Types of Limited Partnerships
- Formed by syndicating GP’s and sold on a best efforts basis using an escrow account
1. Real Estate Partnership -
2. Oil and gas ventures - from wildcat or exploratory deals, to less profitable but more reliable developmental programs, to more conservative income programs
3. Equipment Leasing Programs - structured to produce income because there is little or no capital appreciation potential
Real Estate LP types
- raw land partnership
- new construction
- rental income
Real estate LP tax advantage opportunities
- Historical Rehab Credit - 75% of original structure
- Low - income housing credit -
- HUD
- provides the best credit
Oil and Gas
- Drilling Program
-wildcat - drilling in an unproven area
-Developmental program - drilling in a proven area
-combination program - wildcat and developmental
-income program - purchases and manages producing wells
-energy programs - have high depletion programs
-depletion is the cost recovery system for wasting nat resource
-incur intangible drilling costs (IDCs)
-ideal for an investor in this arena looking for high first and
second year right offs
Non Recourse vs Recourse
1
Component depreciations
1
What reduces basis?
- Passive loss
- Depletion
- Cash
- what else?