Partnership Taxation Flashcards
Tax - 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.
Tax - 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.
Tax - 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.
Tax - 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.
Tax - 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.
Tax - 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.
Tax - 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.
Tax - 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)
Tax - 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
Tax - 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.
Tax - 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.
Tax - 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)
Tax - 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.
Tax - 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
Tax - REG
Which items are not counted as income on Schedule K of form 1065?
Passive Income
Portfolio Income
1231 Gain or Loss
Mnemonic: PP1231
Tax - 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
Tax - 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)
Tax - REG
What INCREASES partnership basis?
Partnership getting a loan
Capital contributions
Ordinary income
Capital gains
Tax-exempt income
Tax - 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.
Tax - REG
How do guaranteed payments affect partnership basis?
They do not affect basis- they are already included in ordinary income; which affects basis.
Tax - 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)
Tax - 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.
Tax - 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.
Tax - 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.
Tax - REG
When does a partnership terminate?
When there is less than 2 partners (only one partner)
When 50% of the partnership interests sell within a 12 month period- partnership IMMEDIATELY terminates.
Tax - REG
How is gain or loss on sale of a partnership interest calculated?
Gain or Loss = Amount realized on sale - basis in partnership interest
Tax - REG
What is the new basis of a partnership interest sold?
Basis = Capital account + Liabilities assumed
Tax - REG
How is the sale of non-capital partnership property treated?
As ordinary gain/loss.
Items that fall into non-capital category would be unrealized receivables; appreciated inventory; and similar.
Tax - REG
How is a partner’s share of an ordinary gain calculated?
FMV of Assets (non-capital)
- Adjusted basis of assets
= Ordinary gain
x Partner’s % interest
= Partner’s share of gain
Note: No gain or loss will be recognized by a partnership upon distribution of property.
Tax - REG
What is the order of basis reductions for distributions from a partnership?
- Money distributed
- Adjusted basis of unrealized receivables and inventory
- Adjusted basis of other property
Note: Only MONEY distributions will trigger a gain in a partnership distribution.
Tax - REG
When can a LOSS occur in a partnership distribution?
Only in a liquidating distribution.
Tax - REG
What are the requirements for recognizing a gain in a partnership liquidating distribution?
- Money was distributed
- Unrealized receivables were distributed
- Appreciated inventories were distributed
Otherwise; no loss recognized.
