Exam 3 Review Chapter 9

Question 1

Which of the following Best describes a guaranteed payment?

Answer 1

A payment made by a partnership to a partner whether the partnership generates income or losses.

Question 2

Define Recourse Debt

Answer 2

Debt that partners are at risk to pay with their own money

Question 3

Define nonrecourse debt

Answer 3

debt that partners are required to pay from the profits of the partnership that is often secured by partnership property

Question 4

List flow through entities

Answer 4

• Limited partnership
• Limited Liability Company
• S Corporation

Question 5

What is a Capital Account

Answer 5

An account used by a partnership to help partners track their investment in the partnership.

Question 6

A partners interest in a partners interest is treated as a

Answer 6

Capital asset

Question 7

A partners contributes property or services in exchange for the general ownership interest is called

Answer 7

a partnerships interest

Question 8

How is recourse debt allocated

Answer 8

Allocated to partners with ultimate responsibility for paying debt

Question 9

How is Nonrecourse debt allocated

Answer 9

Allocated according to partners’ profit sharing ratios

Question 10

Guaranteed payments

Answer 10

• Guaranteed payments are fixed amounts paid to partners regardless of whether the partnership shows a profit or loss for the year.
• Some partnerships treat them as the “economically equivalent” to cash salary payments made to partners for services provided.
• Guaranteed payments are separately stated items, are treated as ordinary income by partners receiving them, and are either capitalized or expensed (as wages would be) by partnerships.
• Guaranteed payments for services are always treated as self-employment income.

Question 11

How are Guaranteed payments treated in the calculation of a partnership’s ordinary

Answer 11

They are treated as a separately stated items

Question 12

How are guaranteed payments treated for services

Answer 12

They are treated as self employment income

Question 13

Common separately stated items

Answer 13

• Interest income
• Guaranteed payments
• Net earnings (loss) from self-employment
• Tax-exempt income
• Net rental real estate income
• Investment interest expense
• Charitable contributions
• §179 deduction(Note the character of separately stated items is determined at the partnership level rather than at the partner level.)

Question 14

Sarah and Chanz Inc. initially each contributed $120,000 to CCS and CCS borrowed $60,000 from a bank when it was formed. The bank required Nicole, Sarah and Chanz Inc. to personally guarantee the bank loan. The terms were structured so each of the members would (1) be responsible for a portion of the debt equal to the % of CCS losses allocated to each member (1/3 each) and (2) have no right of reimbursement from either CCS or the other members of CCS. How much of the $60,000 bank debt was allocated to each member?

Answer 14

Each member would be allocated $20,000. The debt is treated as recourse debt because the members are personally guaranteeing it. Because each guarantees 1/3 of the debt, the $60,000 debt is allocated equally among them.

Question 15

Sarah and Chanz Inc. initially each contributed $120,000 to CCS and CCS borrowed $60,000 from a bank when it was formed. The bank required Nicole, Sarah and Chanz Inc. to personally guarantee the bank loan. The terms were structured so each of the members would (1) be responsible for a portion of the debt equal to the % of CCS losses allocated to each member (1/3 each) and (2) have no right of reimbursement from either CCS or the other members of CCS. How much of the $60,000 bank debt was allocated to each member?
Assuming the $60,000 bank loan is CCS’s only debt, what is Sarah’s initial basis in her CCS interest after taking her share of CCS’s bank debt into account?

Answer 15

$140,000 ($120,000 cash contribution + $20,000 share of the bank loan)

Question 16

T or F:For partnership tax years ending after December 31, 2015, partnerships can request up to a six-month extension by filing IRS Form 7004 prior to the original due date of the partnership return.

Answer 16

True

Question 17

T or F: A partner’s outside basis must be increased by any positive basis adjustments and decreased by any distributions.

Answer 17

True

Question 18

T or F : Guaranteed payments are included in the calculation of a partnership’s ordinary business income (loss) and are also treated as separately stated items

Answer 18

True

Question 19

T or F: A partnership without a C corporation partner may generally use the cash method of accounting.

Answer 19

True

Question 20

A partnership may use the cash method despite having a corporate partner when the partnership’s average gross receipts for the prior three taxable years don’t exceed _________.

Answer 20

$25000000

Question 21

Are tax elections made at partnership level?

Answer 21

yes this is true

Question 22

On 12/31/X4, Zoom, LLC reported a $60,000 loss on its books. The items included in the loss computation were $30,000 in sales revenue, $15,000 in qualified dividends, $22,000 in cost of goods sold, $50,000 charitable contribution, $20,000 in employee wages, and $13,000 of rent expense. How much ordinary business income (loss) will Zoom report on its X4 return?

Answer 22

While Zoom shows a loss on its books, some of the items included in calculating its book loss will be separately stated on its return. Specifically, its qualified dividends and charitable contribution deduction will be separately stated. After removing these items from the $60,000 book loss, the ordinary business loss reported on its tax return would be $25,000.

Question 23

Actual or deemed cash distributions in excess of a partner’s outside basis are generally taxable as capital gains.

Answer 23

True

Question 24

Dana and Mike decide to form their new motorcycle business as a LLC. Each will receive an equal profits (loss) interest by contributing cash, property, or both. In addition to the members’ contributions, their LLC will obtain a $75,000 loan nonrecourse loan from First Bank at the time it is formed. Mike contributes cash of $10,000 and a building he bought as a storefront for the motorcycles. The building has a FMV of $65,000, an adjusted basis of $35,000, and is secured by a $40,000 nonrecourse mortgage that the business LLC will assume. What is Mike’s outside tax basis in his LLC interest?

Answer 24

A contributing partner’s outside basis initially consists of the basis of contributed property less any debt relief plus any partnership debt allocated to the partner. When allocating nonrecourse debt secured by the contributed property, any nonrecourse debt that exceeds the basis of the contributed property must be allocated solely to the partner that contributed the property. Any remaining nonrecourse debt is allocating according to the partners’ profit sharing ratios. [$10,000 (cash) + $35,000 (basis of building) – $40,000 (debt on building) + $37,500 (50% profit sharing ratio x $75,000 nonrecourse bank loan) + $5,000 (nonrecourse mortgage less basis of contributed property) + $17,500 (50% x $35,000 remaining mortgage on building) = $65,000]

Question 25

Gerald received a one-third capital and profit (loss) interest in XYZ Limited Partnership (LP). In exchange for this interest, Gerald contributed a building with a FMV of $30,000. His adjusted basis in the building was $15,000. In addition, the building was encumbered with a $9,000 nonrecourse mortgage that XYZ, LP assumed at the time the property was contributed. What is Gerald’s outside basis immediately after his contribution?

Answer 25

A partner’s outside basis consists of the basis of the contributed property less any debt relief the property received plus the portion of debt the partner assumes based upon the partner’s interest in the partnership. In this case, the nonrecourse mortgage is allocated to the partners strictly according to their profit sharing ratios because the mortgage does not exceed the basis in the contributed property. [$15,000 − $9,000 + ($9,000 × 33%)].

Question 26

Income earned by flow-through entities is usually taxed only once at the entity level.

Answer 26

False

Question 27

What is inside basis and outside basis, and why are they relevant for taxing partnerships and partners?

Answer 27

Inside basis is the basis the partnership takes in the assets that the partnership holds.
Outside basis is the tax basis each partner has in the partnership.

Question 28

Joseph contributed $22,000 in cash and equipment with a tax basis of $5,000 and a fair market value of $11,000 to Berry Hill Partnership in exchange for a partnership interest.
What is Joseph’s tax basis in his partnership interest?

Answer 28

Joseph contribution $22,000
+tax basis $5,000
= $27,000

Question 29

Outside basis

Answer 29

A partner’s tax basis in his/her partnership interest

Question 30

Inside basis

Answer 30

The partnership’s basis in its assets

Question 31

Assume that Sarah contributed $120,000 in cash to CCS in exchange for her partnership interest and that CCS had no liabilities. What is Sarah’s outside basis in her partnership interest after the contribution?

Answer 31

Sarah’s basis is $120,000 (cash she contributed)

Question 32

Potential Gain to Contributing Partner

Answer 32

The contributing partner recognizes gain only if the cash deemed to have been received from a partnership distribution exceeds the contributing partner’s tax basis in her partnership interest prior to the deemed distribution. Any gain recognized is generally treated as capital gain.
1)Basis in contributed land
2)Cash contributed
3)Nicole’s share of debt
4) (Debt relief)
=5)Debt relief in the excess of basis in contributed land and cash
6)Capital gain recognized

Question 33

Partner’s Holding Period in Partnership Interest

Answer 33

• Contributing partner’s holding period in a partnership interest depends on the type of property contributed.
• As partnership interest is a capital asset, its holding period determines whether gains or losses from the disposition of the partnership interest are short-term or long-term capital gains or losses.

Question 34

Determining a Partnerships Year-end

Answer 34

• The majority interest taxable year is the taxable year of one or more partners who together own more than 50 percent of the capital and profits interests in the partnership.
• Under the principal partners test, the required tax year is the taxable year the principal partners all have in common and principal partners are those have more than a 5 percent interest in the partnership profits and capital.
• The tax year with the least aggregate deferral is the one among the tax years of the partners that provides the partner group as a whole with the smallest amount of aggregate tax deferral.