Partnership Taxation Flashcards
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.
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.
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.
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.
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.
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.
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)
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
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.
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.
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)
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.
Which items are not deductible on Schedule K of form 1065?
Foreign tax paid
Investment interest expense
Section 179 expense
Charitable contributions
Mnemonic: IFC179
Which items are not counted as income on Schedule K of form 1065?
Passive Income
Portfolio Income
1231 Gain or Loss
Mnemonic: PP1231
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
