Exam 3 Review Chapter 9 Flashcards
(34 cards)
Which of the following Best describes a guaranteed payment?
A payment made by a partnership to a partner whether the partnership generates income or losses.
Define Recourse Debt
Debt that partners are at risk to pay with their own money
Define nonrecourse debt
debt that partners are required to pay from the profits of the partnership that is often secured by partnership property
List flow through entities
- Limited partnership
- Limited Liability Company
- S Corporation
What is a Capital Account
An account used by a partnership to help partners track their investment in the partnership.
A partners interest in a partners interest is treated as a
Capital asset
A partners contributes property or services in exchange for the general ownership interest is called
a partnerships interest
How is recourse debt allocated
Allocated to partners with ultimate responsibility for paying debt
How is Nonrecourse debt allocated
Allocated according to partners’ profit sharing ratios
Guaranteed payments
- 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.
How are Guaranteed payments treated in the calculation of a partnership’s ordinary
They are treated as a separately stated items
How are guaranteed payments treated for services
They are treated as self employment income
Common separately stated items
- 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.)
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?
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.
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?
$140,000 ($120,000 cash contribution + $20,000 share of the bank loan)
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.
True
T or F: A partner’s outside basis must be increased by any positive basis adjustments and decreased by any distributions.
True
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
True
T or F: A partnership without a C corporation partner may generally use the cash method of accounting.
True
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 _________.
$25000000
Are tax elections made at partnership level?
yes this is true
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?
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.
Actual or deemed cash distributions in excess of a partner’s outside basis are generally taxable as capital gains.
True
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?
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]
