Partnership Taxation

Question 1

What is the initial basis of a partner’s interest?

Answer 1

Cash Amount Contributed
+ Property Adjusted Basis (NBV)
- % (Liabilities) Liab. assumed by other partners
+ Services FMV (and taxable to partner)
+ % Liabilities Liab. assumed by incoming partner
____________________________________________
= Beginning Capital Account

Question 2

What is the basis of contributed property to the partnership?

Answer 2

Basis to the partnership is the partner’s basis increased by any gain recognized by the partner on the contribution.

Question 3

State the holding period for a partner’s interest.

Answer 3

Is equal to the holding period of the property contributed if the property were a capital asset or a Section 1231 asset in the hands of the partner. If the property were an ordinary income asset (i.e., inventory) the holding period starts on the date of contribution to the partnership.

Question 4

What is the formula for a partner’s basis in its partnership interest?

Answer 4

Basis = Capital Account + Partner’s share of partnership recourse liabilities

Question 5

When does a partnership cease to exist, for tax purposes?

Answer 5

• When operations cease
• When 50% or more of the total interest (capital and profits) in the partnership is sold or exchanged within a 12 month period
• When there are fewer than two partners (the partnership becomes a sole proprietorship)

Question 6

What is the treatment of guaranteed payments to a partner?

Answer 6

A guaranteed payment is a deduction on the partnership tax return, and the payment flows through to the partners as part of the ordinary business expenses on the K-1.

Then, because the partner is not considered an employee the payment must be included in self-employment income on the partners return.

Question 7

What is the limit on the deductibility of a partnership loss to a partner?

Answer 7

• Partnership loss deduction to a partner is limited to the partners adjusted basis in the partnership interest (called the “at risk” provision).
• Any unused loss can be carried forward and used in a future year when basis becomes available.
• The partner also may be subject to passive activity loss limitaitons.

Question 8

How are the partnership income and losses reported?

Answer 8

All of the below are on the Schedule K-1:

1. Net business income or loss
2. Guaranteed payments to partners
3. Net “active” rental income or loss
4. Net “passive” rental income or loss
5. Interest Income
6. Dividend Income
7. Capital Gains and Losses
8. Charitable contributions
9. Section 179 “bonus depreciation”
10. Investment interest expense.
11. Partner’s health insurance premiums
12. Retirement plan contributions (Keogh Plan)
13. Tax Credits

Question 9

How are partnership losses treated at the partner level?

Answer 9

A partner reports losses on the partner’s income tax return to the extent the partner has basis.

A partner’s loss in excess of the partner’s basis, and any loss not allowed on account of the “at risk” rules or the “passive activity loss” rules, will be a carryforward indefinitely (and remain suspended until basis becomes available or the partner disposes of the entire partnership interest).

Question 10

When a partnership is terminated, what basis does the partner assume for distributed property?

Answer 10

• Upon termination of a partnership, a partner’s basis in the property distributed from the partnership is equal to the partner’s basis in the partnership interest reduced by any money received.
• The holding period of the property includes the partnership’s holding period.