Partnership Taxation Flashcards
General Partners
can participate in management
joint and several liability
All partnerships MUST have one general partner
Limited Partner
liable ONLY up to their investment
CANNOT participate in management w/o losing limited liability status
LLC Members
Have limited liability
Filing
FORM 1065
Advantages
Flexibility provided for business owners to help meet various needs
LLC - ALL members have limited liability
Partners can usually get in and out without recognizing a gain
Single taxation
Formation Rules
Will not recognize a gain or loss from the contribution of property in exchange for a partnership interest
DOES not apply for interests received for SERVICES, for which WAGE INCOME is recognized = FMV of interest
Basis
The partner takes a substituted basis in interest (basis he/she had in prop transferred) and the partnership takes a carryover basis in the asset’s it receives
When partnership begins, adjusted basis in interest is adjusted to reflect results of operations
Holding Period
Partner’s holding period in interest
- tacks on for capital and sec 1231 assets
- does NOT tack on for any other asset
Partnerships holding period will always carry over
Basis Adjustments
Initial basis is INCREASED by:
- Partner’s share of taxable and nontaxable income
- Increases in share of debt
- Additional contribution partner makes to partnership
DECREASES:
- deductions/NON-deductible items NONcapitalizablle expenditures
- Decreases in debt
- Distributions
NEGATIVE basis results in gain recognition
Liabilities - Recourse Debt
Partners increase/decrease basis as their share of partnership debt changes
NonRecourse - debt for which the lender has NO recourse except to take property back –cannot go after any other assets
- Profit sharing ratio used to increase basis
- BOTH general and limited partners
For RECOURSE - each partner’s share of debt is measured by his “economic risk of loss” assuming a “constructive liquidation scenario” (increase by ownership interest in property)
***LIMITED PARTNERS get NO increase in basis for recourse debt
Year-Ends
USE the SAME year-end as the majority interest partners (> 50% capital & profit interest)
IF no single year from this…. then uses the same as principal partners (5% or more profits interest)
Default - least aggregate deferral method
Loss Limitations (flow-through)
THREE HURDLES must be cleared for LOSS to be DEDUCTED
- Basis
- At-Risk Amount (basis - nonrecourse debt)
- Passive Income (If passive loss)
Separately Stated Items
- Charitable Contributions
- Net income from rental real estate/other rentals
- Interest Income
- Guaranteed Payments
- Dividends/royalties
- Cap gains/losses
- 1231 gains/losses
- 179 expenses
- Tax credits
- AMT adj/pref
- Tax-Exempt Income
Non-Separately Stated “bucket” - P. 1 1065
“The Bucket” ordinary business income or loss
Each proportionate share is reported on Schedule K-1 (both bucket and separately stated)
Organization and Start-Up Costs
5,000 of these may be deducted - is reduced when total expenses exceed 50,000
Amortize amount not expensed
Guaranteed Payments
Are paid to a partner in his/her role as a partner (e.g. salaries)
- DETERMINED without regard to partnership income
- ORDINARY INCOME to the partner and are - —- Deductible by the partnership “bucket item”
- Taxed as if they were paid on the last day of the taxable year
Built-In Gains/Losses
If a partnership disposes of an asset that was contributed by a partner and at the time of the contribution the asset had a BIG or BIL, the recognized gain/loss is allocated back to the contributing partner to the extent of the BIG or BIL
Prevents taxpauers from using partnerships to transfer appreciation/depreciation to other partners - NO time limit
Related Party Losses
DISALLOWED between a partnership and person owning more than 50% of capital or profits
also between two partnerships if same person owns more than 50% of capital or profits
Constructive ownership rules apply
Non-Liquidating Distribution
In general, NO GAIN OR LOSS is recognized by the partnership or the partner for a PROPORTIONATE nonliquidating partnership
**IF CASH DISTRIBUTED exceeds partners basis in partnership interest A GAIN is RECOGNIZED — usually cap gain
**NEVER a LOSS
In general, property takes a carryover basis to distriutee partner and the partner REDUCES his/her BASIS in interest by the basis of the property distributed
Distributions
Deemed to be distributed IN the following ORDER:
- Cash
- Unrealized receivables and invetory (no cash, captial, sec 1231)
- Capital Assets and Section 1231 Assets
Liquidating Distribution
Rules are the same as non-l BUT
- LOSS IS RECOGNIZED if:
- The partner receives ONLY cash, unrealized receivables and inventory
- The inside basis of these assets is LESS THAN the partners basis in the partnership - The partner’s basis MUST be REDUCED TO ZERO ***Because liquidating
Partner Retirements
In general payments received are treated as liquidating distribution
IF partner is a GENERAL P in a service oriented partnership then:
- Unrealized receivables and Unstated goodwill are taxed as Ordinary Income
- Remaining payments are treated as being in exchange for partnership property
Sales
A partnership is a CAPITAL ASSET - this gain/loss is in general capital in nature
However to the extent the partnership has HOT ASSETS, gain will be recharacterized as Ordinary Income
Hot Assets
- Unrealized Receviables (recevables of a cash basis taxpayer; includes depreciation recapture)
- Inventory (no cash, 1231, capital)
