Partnership Taxation Flashcards
CPA - Reg
True or false? Partnerships are a taxable entity.
False. Income and expenses flow through to the partner to be taxed via a
Form K-1.
CPA - Reg
When exchanging property for a partnership interest; how is gain or loss recognized?
Neither gain nor loss is recognized in an exchange of property for a partnership interest. It is a non-taxable event.
CPA - Reg
What is a partner’s basis in partnership property?
Initial basis for partnership property is the basis of the property that was contributed or exchanged for the partnership interest.
CPA - Reg
When services are exchanged for a partnership interest; how is this treated for tax purposes?
It is a taxable event; treated the same as compensation for the services. The taxable income equals the % of partnership interest received times the FMV of the partnership.
i.e. the FMV of the interest received is the taxable income for the service provider.
CPA - Reg
What is the partner’s basis in a partnership when they provide a service in exchange for the interest?
The basis in the partnership interest is the amount of taxable service revenue provided by service provider.
CPA - Reg
What is the holding period of an asset that has been contributed to a partnership?
The partnership inherits the holding period of the asset contributed.
The exception of inventory- the holding period begins when contributed.
CPA - Reg
What is the tax treatment of startup costs for a partnership?
Tax treatment is the same as that of an individual taxpayer.
However syndication fees are not deductible or amortized.
CPA - Reg
What deductions are subtracted from gross revenues to arrive at partnership income?
COGS
Wages - except for partners
Guaranteed payments to partners
Business bad debt (if on accrual basis)
Interest paid
Depreciation (except section 179)
Amortization (Startup costs; goodwill; etc)
CPA - Reg
How are partnership losses taken on an individual’s return?
Losses cannot be taken beyond a partner’s basis in the partnership
Losses in excess of basis are carried forward until basis is available
CPA - Reg
When are guaranteed payments to a partner includable in taxable income?
They appear in partner’s income during the year in which the partnership’s fiscal year CLOSES.
CPA - Reg
How are partner benefits paid by the partnership treated?
Health insurance; life insurance and other benefits paid on behalf of the partner are treated as guaranteed payments and are includable as self-employment income.
CPA - Reg
How is net self-employment income from a partnership interest calculated?
Partner’s % share of ordinary income from partner’s K-1
+ Guaranteed payments
- Partner’s % share of section 179 expense from K-1
= Self-employment income (subject to SE tax)
CPA - Reg
In general; what is a partner’s basis in partnership property purchased?
Partner’s basis is basis of goods exchanged or for services exchanged is FMV of partnership interest received.
If purchased; purchase price less liabilities incurred = basis.
For a gifted interest in a partnership; gift basis rules apply.
CPA - Reg
Which items are not deductible on Schedule K of form 1065?
Foreign tax paid
Investment interest expense
Section 179 expense
Charitable contributions
Mnemonic: IFC179
CPA - Reg
Which items are not counted as income on Schedule K of form 1065?
Passive Income
Portfolio Income
1231 Gain or Loss
Mnemonic: PP1231
CPA - Reg
How is adjusted partnership basis calculated?
Beginning partnership basis
+ Capital contributions
+ Share of ordinary partnership income
+ Capital gains
+ Tax-exempt partnership income (DON’T FORGET!)
= Ending partnership basis
CPA - Reg
What items DECREASE partnership basis?
Money distributed
Adjusted basis of property distributed
Partners’s share of ordinary losses
Partnership is relieved of a liability (considered a distribution)
CPA - Reg
What INCREASES partnership basis?
Partnership getting a loan
Capital contributions
Ordinary income
Capital gains
Tax-exempt income
CPA - Reg
How do liabilities either INCURRED or RELIEVED affect a partner’s basis in a partnership?
If the partnership gets a loan; this INCREASES basis.
If partnership is relieved of a liability; this DECREASES basis.
CPA - Reg
How do guaranteed payments affect partnership basis?
They do not affect basis- they are already included in ordinary income; which affects basis.
CPA - Reg
What is the order in which basis is adjusted in a partnership?
- Increase basis (all items; including tax-exempt income)
- Distributions
- Losses (limited to basis)
CPA - Reg
How is the taxable year of a partnership determined?
It must be the same as 50% of the partners and use the same tax year for 3 years once adopted.
CPA - Reg
How does death of a partner affect the partnership’s taxable year?
The taxable year closes with respect to the decedent partner’s interest ONLY.
CPA - Reg
When CAN’T a partnership use cash basis?
- They have inventories
- Partnership is a tax shelter
- Has a corporate partner
- Gross receipts are $5 Million or more
Exception: If gross receipts are $1 Million or LESS and Partnership maintains inventories; Cash method is ok.
