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.
How is gain or loss recognized, when there is a contribution of property ** to the **partnership in exchanging for an interest in the partnership?
- No gain nor loss is recognized in an contribution of property for a partnership interest. It is a non-taxable event.
-
EXCEPTION A partner must recognize income when property is contributed which is subject to a liability, AND the resulting decrease in the partner’s individual liability exceeds the partner’s partnership basis.
- The excess of liability over adjusted basis is generally treated as a capital gain from the sale or exchange of a partnership interest.
- The gain will be treated as ordinary income to the extent the property transferred was subject to depreciation recapture under Sec. 1245 or 1250.
What is a partner’s basis in partnership when transfert property?
- Partner basis’s in P/S = is the basis of the property** contributedor exchanged for the partnership interest -carryover basis**
- P/S ‘s basis for asset contributed = patner’s basis - transfer basis
When services are exchanged for a partnership interest; how is this treated for tax purposes?
- **P/S (partnership) recognizes expenses = FMV **
- Partner recognizes income & basis for partnership interest = FMV- equals the % of partnership interest received times the FMV of the service
What is the holding period of an asset that has been contributed to a partnership?
- Capital asset or section 1231 assets, P/S’s holding periode for contributed property = partner’s holding period
- All other property ( such as inventory) - P/S’s holding period = when contributed
What is the tax treatment of startup costs for a partnership?
- Tax treatment is the same as that of an individual taxpayer.
- Deducted up to $5,000 in year of business begins - reduced dollar-for-dollar by amount over $50,000 - remaining amortized over 180 months
- NOTE syndication fees - includes the cost connected with issuing and marketing of P/S interest suchs as commissions, professional fees and printing cost are NOT deductible or amortized
What deductions are subtracted from gross revenues to arrive at partnership income?
- COGS
- Wages 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
- the at-risk and passive activity loss limitations apply at the partner level, rather than at the P/S level
**Guaranteed Payments to Partners **
- amounts parthers are entitled to regardless of the P/S’s profit of loss (like salary)
- taxable to the partner as ordinary income and subject to self-employement tax
- **deductible to P/S as ordinary income **
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 includable as self-employment income
How is net self-employment income from a partnership interest calculated?
Self-employment income (subject to SE tax) =
Partner’s % share of ordinary income from partner’s K-1
+ Guaranteed payments
- Partner’s % share of section 179 expense from K-1
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 partner’s basis in partnership calculated?
Initial basis
+ any subsequent capital contributions
+ share of ordinary partnership income INCLUDING Tax-exempt partnership income
**+ **share of capital gains
- distributions (cash + AB of property)
- share of expenses and losses ( including not deductible items)
+/- changes in liablities
= ending partner basis
What items DECREASE partnership basis?
- Money distributed
- Adjusted basis of property distributed
- Partners’s share of ordinary losses (as well as nondeductible items not properly chargeable to capital)
- Partnership is relieved of a liability (considered a distribution)
**BUT NOT BELOW ZERO **
What INCREASES partnership basis?
- Partnership getting a loan
- Capital contributions
- Ordinary income
- Capital gains
- Tax-exempt income
How do liabilities either INCURRED or RELIEVED affect a partner’s basis in a partnership?
- Liabilities INCURRED = If the partnership gets a loan; this INCREASES basis.
- Liabilities RELIEVED = If partnership is relieved of a liability, treated as distribution; this DECREASES basis.
How do guaranteed payments affect partnership basis?
They do not affect basis- they are already included in ordinary income; which affects basis.
What is the order in which basis is adjusted in a partnership?
1. Increase basis (all items; including tax-exempt income)
- Distributions
3. Losses (limited to basis)
How is the taxable year of a partnership determined?
- adopt the **same tax year as used by one or more of its partners owing more than 50% of the partnership interests **
- if partners owing more than 50% of the partnership interests do not have the same tax year ⇒ adopt tax year used by partners owing 5% or more of interest if all have the same year
- if partners owing 5% or more of interest do not have same year ⇒ use the tax year that result in least deferral of income to partners- less than 3 months
use the same tax year for 3 years once adopted
Partnership’s taxable year
- The taxable year of a partnership ordinarily will **NOT close as a result of the death or entry of a partner, or the liquidation or sale of a partner’s interest. **
- **BUT the partnership’s taxable year closes as to the partner whose entire interest is sold or liquidated. ** Additionally, the partnership tax year closes with respect to a deceased partner as of date of death.
When CANNOT 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.
When does a partnership terminate?
Partnership IMMEDIATELY terminates when:
- there is less than 2 partners (only one partner)
- 50% of the partnership interests sell in a 12 month period
- no part of any business of the partnership continues to be carried by any of its partneres
How is gain or loss on sale of a partnership interest calculated?
- Gain or Loss = Amount realized on sale - basis in partnership interest
- Amount realized on sale= Cash+ FMV of property received+ assumption of selling partner’s share of partnership liabilities
- Gain = **Ordinary income to the extent of partner’s share of unrealized receivable **(include recapture potential in depreciable assets, AR of cash method TP)and appreciated inventory
- any remaining amount is capital gain or loss
