Partnership Taxation

Question 1

What increases a partner’s basis in the partnership:

Answer 1

• Additional contributions
• Additional interest purchased/inherited
• Partner’s share of income (including tax-exempt)
• Any increases in the partner’s share of liabilities.

Recourse vs Nonrecourse debt: RD does not apply to limited partners. The rest of recourse debt is determined by economic risk of loss) Nonrecourse debt is by profit sharing ratios.

Question 2

What decreases a partner’s basis in the partnership?

Answer 2

• Cash and partnership’s adjusted basis of property received by partner in a nonliquidating distribution
• Adjusted basis allocable to any part of the partner’s interest sold/transferred
• Partner’s share of losses
• Any decreases in share of liabilities

Question 3

Partner’s initial basis in a partnership is:

Answer 3

Cash contributed plus partner’s adjusted basis for property when contributed. Liabilities assumed with contributed property decreases the basis by amount assumed by other partners. (Determined by partnership interest acquired, the rest is assumed by other partners) Basis cannot go under 0, a gain is recognized instead if the liabilities assumed by other partners is greater than their basis.

Question 4

Holding period of a partnership interest begins on:

Partnership’s holding period in property:

Answer 4

Date partner’s holding period of 1231 or capital asset began (if it was exchanged for capital asset). The rest is when contribution is received by the partnership.

Always includes holding period partner had.

Question 5

Partnership’s basis in property is:

Answer 5

Basis in the hands of the partner (ignore liabilities assumed).

Question 6

A partnership may elect to have a tax year other than the generally required tax year if:

Answer 6

the deferral period for the tax year elected does not exceed 3 months. “A valid business purpose” is also another reason to claim something other than the generally required tax year.

The partnership and S Corp must estimate the amount of tax that is attributable to the short period and make payments.

Question 7

Services contributed to partnership is treated as:

Answer 7

Wage income by the shareholder, it must recognize the income and increase their basis. If it isn’t stated, look at FMV of capital interest (transferred assets).

Question 8

Partnership interests that change due to admittance of new partner affects liabilities how:

Answer 8

Compare BOY liabilities with BOY interest and EOY liabilities with EOY interest. Compute difference and adjust as normal.

Question 9

When someone contributes services for capital interest, the individual does the following:

Answer 9

-Reporting ordinary income equal to fair market value of transferred capital interest. It is treated as guaranteed payments. (which is the FMV of the assets transferred).

Question 10

Guaranteed payments treated for calculating basis and for calculating income:

Answer 10

Treated as payment for services, it is not a flow-through item. It also counts as a nonseparately stated item.

Question 11

The only time a gain can be recognized by a partner is:

Answer 11

If cash distribution is greater than basis. The gain is usually capital.

Question 12

Net losses in excess of at-risk amount for an activity is:

Answer 12

The excess is suspended and carried forward without expiration against income in future years from that activity (not against other activity).

Question 13

Partnership incorporation expenses are:

Answer 13

Treated the same as corporation expenses. (5K/50K/180) Fees associated with selling the interest may not be expensed or amortized.

Question 14

Non-separately stated income of a partnership is:

Answer 14

The ordinary income.

Question 15

Amount of at-risk limit for a taxpayer is:

Answer 15

cash and basis of property contributed to an activity. Borrowed amounts are considered to be at risk to extent that taxpayer is personally liable.
Applies to partnership individuals only.

Question 16

Passive activity rules prevent:

Answer 16

offsetting of nonpassive income with passive losses and credits from passive activities.

Applies to partnership individuals only.

Question 17

Partnership taxation rules (for non-incorporated entities):

Answer 17

• Only business owner makes it disregarded and taxed like it was on a 1040.
• More than one, it is a partnership default
• Owners can elect for it to be taxed as a corporation

Question 18

Three step process for determining year-end:

Answer 18

• Majority interest partner(s) (>50% capital and profit interest)
• Principal Partners (5% or more) all need to have the same year
• Least Aggregate Deferral Method

Question 19

Hurdles for deducting a partnership loss:

Answer 19

• Basis of Partnership Interest
• At-Risk Amount (Generally Basis - Nonrecourse Debt)
• Passive Income (if it was a passive loss)

The rest can be carried forward.

Question 20

Common examples of separately stated items:

Answer 20

Dividends, Capital Gains/Losses, Tax-exempt interest, passive losses, charitable contributions, investment income, section 179 expenses

Question 21

Guaranteed payments are treated how for tax purposes:

Answer 21

Guaranteed payments from a partnership are made without regard to partner’s share of partnership income. Therefore it is:

• Deductible as a business expense
• Includable on K-1 to be taxed as ordinary income for partner who performed services for the payment
• Does not increase tax basis of partner
• Taxed as if paid on the last day of taxable year (regardless of if it was actually paid or when it was paid)

Question 22

Realized gain on sale of contributed property is:

Answer 22

Lower of:

• Built in gain on the contribution (FMV - Basis).
• Realized gain

The remaining gain is allocated according to the partnership interest (so the partner who contributed gets gain first and then gets another share again).

Question 23

Related Party Losses apply if (describe remaining rules):

Answer 23

• Partnership and Person owning >50% of capital or profit interests
• Two partnership if same person owns more than 50% of capital or profit interest

Constructive (deemed) ownership rule applies

Loss becomes a right to offset for partnership when sold later to offset gain, can’t reduce the gain to a loss so if there is excess, it is lost (it can’t be carried forward).

Question 24

Basis in property in nonliquidating distribution is:

Answer 24

Same as partnership’s basis before distribution. It cannot exceed basis in partnership minus cash received.

Question 25

Gain in nonliquidating distribution only occurs when:

Answer 25

Cash distributed exceeds basis in partnership, Gains from property distributions other than cash are not recognized until partner sells property.

Question 26

Basis in property distributed “in kind” in complete liquidation is:

Answer 26

Adjusted basis of partner’s interest minus cash distributed in same transaction. Basis of partnership must be reduced to zero essentially.

Question 27

Partnership retirement steps:

Answer 27

1. Calculate basis (Capital Account + Liabilities)
2. Determine Distribution for Year (Liabilities assumed + cash paid out for that year)
3. Compare distribution to basis, no income recognized if Basis > Distribution, remaining basis is offset against future income.

Payments for unrealized receivables and unstated goodwill are taxed as ordinary.

Remaining payments are treated as being in exchange for partnership property.

Question 28

Ordering Rules in Non-liquidating Distribution:

Answer 28

1. Cash
2. Hot Assets: Unrealized receivables and inventory (all assets except cash, capital and 1231 assets)
3. Capital/1231 Assets

Question 29

Liquidating Distributions Losses are recognized if:

Answer 29

-Partnership doesn’t receive capital or 1231 assets and the distribution is under their basis

Question 30

How is a gain recognized for partnership interest sale?

Answer 30

Capital gain but ordinary to extent partnership has hot assets (unrealized receivables and inventory)

Question 31

How is character of gain on sale taxed?

Answer 31

Excess of ordinary gain will be taxed at capital rates.

Gain will be taxed at 28% to extent it is due to collectibles
Gains will be taxed at 25% on any unrecaptured 1250 gains
The rest is taxed at 15%

Question 32

Partnership Termination Requirements

Answer 32

No part of the business continues to be carried on by any partner
Sale/Exchange of at least 50% interest in both capital/profits within a consecutive 12-month period

If business is continued it is a deemed distribution of assets to remaining partners and new purchaser and hypothetical recontribution

Question 33

When does original partnership still continue in new partnerships that resulted from a division of partnership?

Answer 33

When partners that controlled 50% or more of the partnership interest in original partnership.