Partnership Taxation Flashcards
When are partnership returns due?
How much income tax is paid?
March 15th
No tax is paid.
Do partners pay tax on income?
Yes, partners pay tax whether or not it was distributed.
Are partnership profit distributions taxed?
No, because partners have already paid tax on this income in the year that it was earned.
What does a partner receive to report their portion of the pass-through amounts to be reported on their 1040?
Schedule K-1
What is Schedule K?
Where all pass-through items are combined in total for the partnership. All K-1s should tie to the Schedule K.
In a partnership, what is a guaranteed payment to a partner? How does the partner report on their 1040?
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.
What is the maximum amount of a partnership loss that an individual can deduct on their tax return?
The maximum loss is limited to the balance that the partner has “at risk”.
At risk = Basis
Where does ordinary income flow through on the 1040?
How about guaranteed payments?
Both get reported on Schedule 1 - Part 1 - Additional Income,
Line 5
Where do interest and dividends flow through to the individual’s partner’s 1040?
Schedule B, like normal personal interest and dividends
Where do capital gains flow through to the individual’s partner’s 1040?
Schedule D, like normal personal capital gains
Where do you go to get more information about amounts on Schedule K-1 such as “Other Information”?
Go back to the Schedule K for more detail
Where do charitable contributions flow through to the individual’s partner’s 1040?
On Schedule A, just like normal charitable contributions
PARTNERSHIP BASIS:
Decreases to Basis
- Withdrawals and Distributions
- Losses
- Repayment of Loans made by Partner
- Repayment of Partnership Loan
PARTNERSHIP BASIS:
Increases to Basis
- Investments into Partnership
- All income earned whether taxable or non-taxable
- Loans made to partnership BY PARTNER
- Ownership % of partnership debts
Partnerships:
How are contributions of property valued?
At the partner’s basis NOT FMV.
PARTNERSHIP:
Liquidating distribution
The partner removes entire investment in partnership
Also record CASH first, then all other assets
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?
As a S-T or L-T capital gain or loss.
PARTNERSHIP liquidating distribution:
Basis prior $100,000
Cash $60,000
Land received FMV $70,000
Order of operations for cash/property received
CASH FIRST
Basis in Land becomes $40,000. NO gain or loss, just bring basis to $0.
Normal distribution from partnership - what happens if distribution exceeds basis?
Gain recorded
TRUE OR FALSE:
There is NO possibility of a loss in a non-liquidating/normal distribution.
TRUE
Do assets come out of a partnership at basis or FMV?
Basis
How is debt relief handled in a terminating distribution?
The partner’s portion of liabilities that are relieved are added to the amount realized for purposes of calculating a gain or loss.
How are any “hot assets” handled in a terminating distribution?
“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.
What did the TCJA do to a “technical termination”?
It was eliminated.
Previously, if more than 50% of partnership ownership changed hands in a year it was considered a technical termination.
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?
Always basis.
Partner basis - Asset Basis = Partner’s reduced basis
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?
$0. No cash given. Basis reduced to zero.
In a partnership distribution, the only time you will have a gain is if the ________ received is greater than the ______.
In a partnership distribution, the only time you will have a gain is if the cash received is greater than the basis.
Do guaranteed payments affect partner basis?
No.
Guaranteed payments are a business expense to the partnership and ordinary income to the partner who receives.
How much tax at the partnership level?
Zero.
Informational only.
All tax on income gets paid by the partners.
As a general rule, a partner who sells or exchanges their partnership interest recognizes what type of income?
A capital gain or loss
What are “hot assets” considered?
Unrealized receivables
Appreciated inventory
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?
3 years
Rendering services IN EXCHANGE for partnership - what happens on the partner’s return?
The partner recognizes ORDINARY INCOME for the amount of partnership basis received in return.
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?
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.
Does partnership income qualify for the QBI deduction?
Yes, all pass-through income qualifies.
Partnership interest expense is an _______ whereas interest Income is a ______.
Partnership interest expense is an ordinary business deduction whereas interest Income is a separately stated item.
If a partner makes a loan to the business, does it increase all partner’s basis or just the partner making the loan?
If a partner makes a loan to the business, it will only increase their own basis.
How is normal depreciation vs. Section 179 depreciation handled in a partnership?
Normal - ordinary business deduction
179 - separately stated flow-thru item
WHat is the partnership loss limit that a partner can deduct from his personal income taxes?
Loss is limited to the partner’s basis in the partnership.
Do guaranteed payments to partners qualify as part of the QBI deduction?
No, only income from the partnership.
Are limited partners granted a share of recourse debt?
No
