Partnership Taxation

Question 0

When exchanging property for a partnership interest; how is gain or loss recognized?

Answer 0

Neither gain nor loss is recognized in an exchange of property for a partnership interest. It is a non-taxable event.

Question 1

True or false? Partnerships are a taxable entity.

Answer 1

False. Income and expenses flow through to the partner to be taxed via a Form K-1.

Question 2

What is a partner’s basis in partnership property?

Answer 2

Initial basis for partnership property is the basis of the property that was contributed or exchanged for the partnership interest.

Question 3

When services are exchanged for a partnership interest; how is this treated for tax purposes?

Answer 3

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.

Question 4

What is the partner’s basis in a partnership when they provide a service in exchange for the interest?

Answer 4

The basis in the partnership interest is the amount of taxable service revenue provided by service provider.

Question 5

What is the holding period of an asset that has been contributed to a partnership?

Answer 5

The partnership inherits the holding period of the asset contributed. The exception of inventory-the holding period begins when contributed.

Question 6

What is the tax treatment of startup costs for a partnership?

Answer 6

Tax treatment is the same as that of an individual taxpayer. However syndication fees are not deductible or amortized.

Question 7

What deductions are subtracted from gross revenues to arrive at partnership income?

Answer 7

COGSWages- except for partnersGuaranteed payments to partnersBusiness bad debt (if on accrual basis) Interest paidDepreciation (except section 179)Amortization ( Startup costs; goodwill; etc)

Question 8

How are partnership losses taken on an individual’s return?

Answer 8

Losses cannot be taken beyond a partner’s basis in the partnershipLosses in excess of basis are carried forward until basis is available.

Question 9

When are guaranteed payments to a partner includable in taxable income?

Answer 9

They appear in partner’s income during the year in which the partnership’s fiscal year CLOSES.

Question 10

How are partner benefits paid by the partnership treated?

Answer 10

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.

Question 11

How is net self-employment income from a partnership interest calculated?

Answer 11

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)

Question 12

In general, what is a partner’s basis in partnership property purchased?

Answer 12

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.

Question 13

Which items are not deductible on Schedule K of form 1065?

Answer 13

Foreign tax paidInvestment interest expenseSection 179 expenseCharitable contributionsMnemonic: IFC179

Question 14

Which items are not counted as income on Schedule K of form 1065?

Answer 14

Passive IncomePortfolio Income1231 Gain or LossMnemonic: PP1231

Question 15

How is adjusted partnership basis calculated?

Answer 15

Beginning partnership basis+Capital contributions+Share of ordinary partnership income+Capital gains+ Tax-exempt partnership income (DON’T FORGET!)=Ending partnership basis

Question 16

What items DECREASE partnership basis?

Answer 16

Money distributedAdjusted basis of property distributedPartner’s share of ordinary lossesPartnership is relieved of a liability (considered a distribution)

Question 17

What INCREASES partnership basis?

Answer 17

Partnership getting a loanCapital contributionsOrdinary incomeCapital gainsTax- exempt income

Question 18

How do liabilities either INCURRED OR RELIEVED affect a partner’s basis in a partnership?

Answer 18

If the partnership gets a loan, this INCREASES basis. If partnership is relieved of a liability, this DECREASES basis.

Question 19

How do guaranteed payments affect partnership basis?

Answer 19

They do not affect basis- they are already included in ordinary income; which affects basis.

Question 20

What is the order in which basis is adjusted in a partnership?

Answer 20

1. Increase basis (all items; including tax-exempt income). 2. Distributions 3. Losses (limited to basis)

Question 21

How is the taxable year of a partnership determined?

Answer 21

It must be the same as 50% of the partners and use the same tax year for 3 years once adopted.

Question 22

How does death of a partner affect the partnership’s taxable year?

Answer 22

The taxable year closes with respect to the decedent partner’s interest ONLY.

Question 23

When CAN’T a partnership use cash basis?

Answer 23

1. They have inventories. 2. Partnership is a tax shelter. 3. Has a corporate partner. 4. Gross receipts are $5Million or moreException: if gross receipts are $1 Million or LESS and Partnership maintains inventories; Cash method is ok.

Question 24

When does a partnership terminate?

Answer 24

When there is less than 2 partners (only 1 partner) When 50% of the partnership interests sell within a 12 month period - partnership IMMEDIATELY terminates.

Question 25

How is gain or loss on sale of a partnership interest calculated?

Answer 25

Gain or Loss = Amount realized on sale - basis in partnership interest

Question 26

What is the new basis of a partnership interest sold?

Answer 26

Basis = Capital account + Liabilities assumed

Question 27

How is the sale of non-capital partnership property treated?

Answer 27

As ordinary gain/loss. Items that fall into non-capital category would be unrealized receivables; appreciated inventory; and similar.

Question 28

How is a partner’s share of an ordinary gain calculated?

Answer 28

FMV of Assets (non-capital) - Adjusted basis of assets = Ordinary gainx Partner’s % interest =Partner’s share of gainNote: No gain or loss will be recognized by a partnership upon distribution of property.

Question 29

What is the order of basis reductions for distributions from a partnership?

Answer 29

1. Money distributed. 2. Adjusted basis of unrealized receivables and inventory. 3. Adjusted basis of other propertyNote: Only MONEY distributions will trigger a gain in a partnership distribution.

Question 30

When can a LOSS occur in a partnership distribution?

Answer 30

Only in a liquidating distribution.

Question 31

What are the requirements for recognizing a gain in a partnership liquidating distribution?

Answer 31

1. Money was distributed. 2. Unrealized receivables were distributed. 3. Appreciated inventories were distributedOtherwise; no loss recognized.