Partnership 2 - Flow-Through of Income and Losses

Question 1

What tax does a partnership pay?

Answer 1

A partnership doesn’t pay tax. Partners do on their return.

Question 2

What form must a partnership file to report the result of its operations?

Answer 2

Form 1065.

Question 3

What items are separately stated or specially allocated? How are they treated re: the partnership’s ordinary income or loss determination?

Answer 3

All items of income, gain, deduction, loss or credit.

Removed from them.

Question 4

On which form does each partner’s proportionate share of separately stated items reported? The partnership’s items?

Answer 4

On Schedule K-1.

On Schedule K.

Question 5

What are items lumped together produce? Where would they be reported?

Answer 5

Ordinary business income or loss.

Form 1065 page 1.

Question 6

What are 9 common items that are separately stated?

Answer 6

• Capital G/L
• Sec. 1231 G/L
• Charitable contributions
• Foreign income taxes
• Sec. 179 expense deduction
• Investment income (interest, dividend, loyalty income)
• Interest expense on investment indebtedness
• Net income (loss) from rental real estate activity
• Tax-exempt income

Question 7

When items separately stated flow through to the partners, what happens to the classification?

Answer 7

Carry through.

Question 8

Why are capital G/L and Sec. 1231 G/L reported separately?

Answer 8

Because they must be netted on the partner’s Form 1040.

Question 9

Why is the charitable contribution reported separately?

Answer 9

Because each partner must know how much it can be deducted.

Question 10

What are 6 items that are not separately reported?

Answer 10

• Sales less COGS
• Business expenses such as wages, rents, bad debts, repairs
• Deduction for guaranteed pmts to partners
• Depreciation
• Amortization (over 180 months) of partnership organization and start-up expenditures
• Sec. 1245 and 1250 recapture

Question 11

What is the classification of the items in the bucket?

Answer 11

Ordinary income.

Question 12

What are 2 areas that items flow through?

Answer 12

1. Flows through as income.

2. Flows through to basis.

Question 13

What’s the treatment of partnership losses for a partner?

Answer 13

A partner can deduct partnership losses on her tax return only to the extent of her basis in the partnership interest.

Question 14

What happens to the partnership losses that exceed the basis?

Answer 14

Carryforward indefinitely.

Question 15

What is the classification of the partnership loss for a limited partner?

Answer 15

A passive loss.

Question 16

Is a partnership loss always passive loss for a general partner?

Answer 16

No, depending on whether the general partner meets the material participation test or not.

Question 17

What are 3 loss limitations and its deduction order?

Answer 17

1. Basis in partnership interest.
2. Limited to at-risk amount (generally basis less share of nonrecourse debt).
3. Passive loss can only deduct against passive income.

Question 18

Question:
A’s share of partnership loss: $50,000 (assumed passive loss).
Basis: $40,000. At-risk amount: $35,000. Passive income: $20,000.
How much loss from the partnership can A deduct on this year’s tax return?

Answer 18

Must cleared 3 hurdles:

1. Basis: 40,000. Carryforward: 10,000 (50,000-40,000)
2. At-risk amount: 35,000. Carryforward: 5,000 (40,000-35,000).
3. Passive income: 20,000. Carryforward: 15,000 (35,000-20,000).

Allowed deduction: 20,000. Carryforward: 30,000.

• Carryforward of 15,000 already passed first 2 hurdles and can be deducted in the future when there is enough passive income.
• Carryforward of 10,000 must clear all 3 hurdles before can be deducted in the future.

Question 19

How much organization cost can be deducted? Limit?

Answer 19

$5,000. This is reduced by the amount of expenditures incurred that exceed $50,000.

Question 20

What happens to the excess organization cost that could not be deducted?

Answer 20

Must be capitalized and amortized over 180 months, beginning with the month the partnership begins its operations (unless an election is made to not do so. Same rule apply for start-up costs.

Question 21

When the partnership sells property, what would be the character of G/L?

Answer 21

Same as the character of the asset by the contributing partner.

Question 22

Example:

When the partnership received pmt for unrealized receivables (A/R for cash method), what is the classification?

Answer 22

Ordinary income regardless of how the partnership held the asset (capital etc).

Question 23

Example: Inventory?

Answer 23

Ordinary income except it will be classified as Sec. 1231 gain if the partnership held the asset for over 5 yrs (held it as Sec. 1231 asset).

Question 24

Example: Capital loss?

Answer 24

Treated as capital loss. There is 5 yr limit.

Question 25

In a family partnership, what’s the treatment of services performed by family members re: income recognition?

Question:
Father and Son are equal partner. Ordinary income: $100,000. Father provided service of worth $40,000 which was a reasonable compensation. Son never performed any services. What is the son’s distributive share?

Answer 25

Services performed by family members must first be reasonably compensated BEFORE income is allocated according to the capital interests of the partners.

(100,000 - 40,000) x 50% = $30,000.