Partnership Taxation

Question 1

When are partnership returns due?

How much income tax is paid?

Answer 1

March 15th

No tax is paid.

Question 2

Do partners pay tax on income?

Answer 2

Yes, partners pay tax whether or not it was distributed.

Question 3

Are partnership profit distributions taxed?

Answer 3

No, because partners have already paid tax on this income in the year that it was earned.

Question 4

What does a partner receive to report their portion of the pass-through amounts to be reported on their 1040?

Answer 4

Schedule K-1

Question 5

What is Schedule K?

Answer 5

Where all pass-through items are combined in total for the partnership. All K-1s should tie to the Schedule K.

Question 6

In a partnership, what is a guaranteed payment to a partner? How does the partner report on their 1040?

Answer 6

A guaranteed payment is a set payment to a partner for work done. The partnership records as an ordinary expense.

This payment is made REGARDLESS of whether or not the business is profitable.

The partner reports this as income.

Question 7

What is the maximum amount of a partnership loss that an individual can deduct on their tax return?

Answer 7

The maximum loss is limited to the balance that the partner has “at risk”.

At risk = Basis

Question 8

Where does ordinary income flow through on the 1040?

How about guaranteed payments?

Answer 8

Both get reported on Schedule 1 - Part 1 - Additional Income,

Line 5

Question 9

Where do interest and dividends flow through to the individual’s partner’s 1040?

Answer 9

Schedule B, like normal personal interest and dividends

Question 10

Where do capital gains flow through to the individual’s partner’s 1040?

Answer 10

Schedule D, like normal personal capital gains

Question 11

Where do you go to get more information about amounts on Schedule K-1 such as “Other Information”?

Answer 11

Go back to the Schedule K for more detail

Question 12

Where do charitable contributions flow through to the individual’s partner’s 1040?

Answer 12

On Schedule A, just like normal charitable contributions

Question 13

PARTNERSHIP BASIS:

Decreases to Basis

Answer 13

1. Withdrawals and Distributions
2. Losses
3. Repayment of Loans made by Partner
4. Repayment of Partnership Loan

Question 14

PARTNERSHIP BASIS:

Increases to Basis

Answer 14

1. Investments into Partnership
2. All income earned whether taxable or non-taxable
3. Loans made to partnership BY PARTNER
4. Ownership % of partnership debts

Question 15

Partnerships:

How are contributions of property valued?

Answer 15

At the partner’s basis NOT FMV.

Question 16

PARTNERSHIP:

Liquidating distribution

Answer 16

The partner removes entire investment in partnership

Also record CASH first, then all other assets

Question 17

Partnership liquidating distribution:

Partner will recognize a gain if distribution exceeds basis.

Partner will recognize a loss if basis exceeds distribution.

How is this reported by partner on 1040?

Answer 17

As a S-T or L-T capital gain or loss.

Question 18

PARTNERSHIP liquidating distribution:

Basis prior $100,000

Cash $60,000

Land received FMV $70,000

Order of operations for cash/property received

Answer 18

CASH FIRST

Basis in Land becomes $40,000. NO gain or loss, just bring basis to $0.

Question 19

Normal distribution from partnership - what happens if distribution exceeds basis?

Answer 19

Gain recorded

Question 20

TRUE OR FALSE:

There is NO possibility of a loss in a non-liquidating/normal distribution.

Answer 20

TRUE

Question 21

Do assets come out of a partnership at basis or FMV?

Answer 21

Basis

Question 22

How is debt relief handled in a terminating distribution?

Answer 22

The partner’s portion of liabilities that are relieved are added to the amount realized for purposes of calculating a gain or loss.

Question 23

How are any “hot assets” handled in a terminating distribution?

Answer 23

“Hot assets” are taken into consideration after the total gain or loss is calculated. Then, the partner’s portion of hot assets are recaptured as ordinary income and thus reduce the capital gain amount.

Question 24

What did the TCJA do to a “technical termination”?

Answer 24

It was eliminated.

Previously, if more than 50% of partnership ownership changed hands in a year it was considered a technical termination.

Question 25

When an asset is coming out of a partnership, do they come out at basis or FV?

What happens if the asset is being transferred to a partner?

Answer 25

Always basis.

Partner basis - Asset Basis = Partner’s reduced basis

Question 26

Lang basis $300,000
Building transferred to Lang at basis $500,000

How much gain does Lang realize if this is a non-liquidating distribution?

Answer 26

$0. No cash given. Basis reduced to zero.

Question 27

In a partnership distribution, the only time you will have a gain is if the ________ received is greater than the ______.

Answer 27

In a partnership distribution, the only time you will have a gain is if the cash received is greater than the basis.

Question 28

Do guaranteed payments affect partner basis?

Answer 28

No.

Guaranteed payments are a business expense to the partnership and ordinary income to the partner who receives.

Question 29

How much tax at the partnership level?

Answer 29

Zero.

Informational only.

All tax on income gets paid by the partners.

Question 30

As a general rule, a partner who sells or exchanges their partnership interest recognizes what type of income?

Answer 30

A capital gain or loss

Question 31

What are “hot assets” considered?

Answer 31

Unrealized receivables

Appreciated inventory

Question 32

If a partnership interest is received in exchange for LEGAL SERVICES, how long must the partnership interest be held to be considered a L-T capital gain?

Answer 32

3 years

Question 33

Rendering services IN EXCHANGE for partnership - what happens on the partner’s return?

Answer 33

The partner recognizes ORDINARY INCOME for the amount of partnership basis received in return.

Question 34

Partner contributes an asset at basis but it has a built-in gain. Partnership eventually sells the asset. Who pays tax on the built-in gain?

Answer 34

The partner that contributes the asset then pays the tax on the entire gain.

The other partners are not taxed on the gain UNLESS there is more of a gain than the built-in gain. The excess gain would be shared equally amongst the partners.

Question 35

Does partnership income qualify for the QBI deduction?

Answer 35

Yes, all pass-through income qualifies.

Question 36

Partnership interest expense is an _______ whereas interest Income is a ______.

Answer 36

Partnership interest expense is an ordinary business deduction whereas interest Income is a separately stated item.

Question 37

If a partner makes a loan to the business, does it increase all partner’s basis or just the partner making the loan?

Answer 37

If a partner makes a loan to the business, it will only increase their own basis.

Question 38

How is normal depreciation vs. Section 179 depreciation handled in a partnership?

Answer 38

Normal - ordinary business deduction

179 - separately stated flow-thru item

Question 39

WHat is the partnership loss limit that a partner can deduct from his personal income taxes?

Answer 39

Loss is limited to the partner’s basis in the partnership.

Question 40

Do guaranteed payments to partners qualify as part of the QBI deduction?

Answer 40

No, only income from the partnership.

Question 41

Are limited partners granted a share of recourse debt?

Answer 41

No