Partnership_Taxation

Question 1

True or false? Partnerships are a taxable entity.

Answer 1

False. Income and expenses flow through to the partner to be taxed via a Form K-1.

Question 2

How is gain or loss recognized, when there is a contribution of property ** to the **partnership in exchanging for an interest in the partnership?

Answer 2

• 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.

Question 3

What is a partner’s basis in partnership when transfert property?

Answer 3

• 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

Question 4

When services are exchanged for a partnership interest; how is this treated for tax purposes?

Answer 4

• **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

Question 5

What is the holding period of an asset that has been contributed to a partnership?

Answer 5

• 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

Question 6

What is the tax treatment of startup costs for a partnership?

Answer 6

• 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

Question 7

What deductions are subtracted from gross revenues to arrive at partnership income?

Answer 7

• 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)

Question 8

How are partnership losses taken on an individual’s return?

Answer 8

• 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

Question 9

**Guaranteed Payments to Partners **

Answer 9

• 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 **

Question 10

How are partner benefits paid by the partnership treated?

Answer 10

Health insurance; life insurance and other benefits paid on behalf of the partner are treated as guaranteed payments and includable as self-employment income

Question 11

How is net self-employment income from a partnership interest calculated?

Answer 11

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

Question 12

Which items are not deductible on Schedule K of form 1065?

Answer 12

• Foreign tax paid
• Investment interest expense
• Section 179 expense
• Charitable contributions

Mnemonic: IFC179

Question 13

Which items are not counted as income on Schedule K of form 1065?

Answer 13

• Passive Income
• Portfolio Income
• 1231 Gain or Loss

Mnemonic: PP1231

Question 14

How is partner’s basis in partnership calculated?

Answer 14

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

Question 15

What items DECREASE partnership basis?

Answer 15

• 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 **

Question 16

What INCREASES partnership basis?

Answer 16

• Partnership getting a loan
• Capital contributions
• Ordinary income
• Capital gains
• Tax-exempt income

Question 17

How do liabilities either INCURRED or RELIEVED affect a partner’s basis in a partnership?

Answer 17

• 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.

Question 18

How do guaranteed payments affect partnership basis?

Answer 18

They do not affect basis- they are already included in ordinary income; which affects basis.

Question 19

What is the order in which basis is adjusted in a partnership?

Answer 19

1. Increase basis (all items; including tax-exempt income)

2. Distributions

3. Losses (limited to basis)

Question 20

How is the taxable year of a partnership determined?

Answer 20

• 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

Question 21

Partnership’s taxable year

Answer 21

• 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.

Question 22

When CANNOT a partnership use cash basis?

Answer 22

• 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.

Question 23

When does a partnership terminate?

Answer 23

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

Question 24

How is gain or loss on sale of a partnership interest calculated?

Answer 24

• 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

Question 25

What is the new basis of a partnership interest sold?

Answer 25

Basis = Capital account + Liabilities assumed

Question 26

How is the sale of non-capital partnership property treated?

Answer 26

As ordinary gain/loss. Items that fall into non-capital category would be unrealized receivables; appreciated inventory; and similar.

Question 27

How is a partner’s share of an ordinary gain calculated?

Answer 27

Partner’s share of gain **= **Ordinary gain x Partner’s % interest

• Ordinary gain = FMV of Assets (non-capital) - Adjusted basis of assets
• Note: No gain or loss will be recognized by a partnership upon distribution of property.

Question 28

What is the order of basis reductions for distributions from a partnership (non liquidating) ?

Answer 28

1. Money distributed

2. Adjusted basis of unrealized receivables and inventory

3. Adjusted basis of other property

Note: Only MONEY distributions will trigger a gain in a partnership distribution, if money distrubuted > partner’s basis.

Question 29

When can a LOSS occur in a partnership distribution?

Answer 29

• Partner recognizes loss ONLY upon complete liquidation of a partnership interest through RECEIPT OF only money, unrealized receivables, or inventory.
• LOSS = basis for the partner’s partnership interest - (money +the partnership’s basis in the unrealized receivables+ inventory received)
• The loss is generally treated as a capital loss
• ** If property other than** money, unrealized receivables, or inventory is distributed in complete liquidation of a partner’s interest, no loss can be recognized

Question 30

What are the requirements for recognizing a gain in a partnership liquidating distribution?

Answer 30

1. Money was distributed
2. Unrealized receivables were distributed
3. Appreciated inventories were distributed

Otherwise; no loss recognized.

Question 31

Intitial basis of the partner’s interest

Answer 31

Beginning Caplital Account or Initial basis of the partner’s interest ** = **

Cash →amount contributed

• *+** Property → AB
• *-** % Liabilities assumed by other partners
• *+** Service @ FMV
• *+** % Liabilities assumed by incoming partner

Question 32

Basis of distributed property in Non liquidating & Liquidating distribution

Answer 32

• Non liquidating distribution: First reduced basis - LOWER of insde or outside basis
  
  • Partner’s basis in P/S> Asset’s basis → Asset
  • Partner’s basis in P/S < Asset’s basis → Partner
• Liquidating distribution: Outside basis → Partner’s basis
  
  • In a liquidating distribution, a partner’s basis for a partnership interest is first reduced by the amount of cash received and by the partnership’s basis for any unrealized receivables and inventory received. Any remaining basis is then allocated to other property received

Question 33

Gain or Loss on a distribution from a partnership to the partners

Answer 33

• Partnership recognizes no gain or loss on a distribution.
• Partner recognizes gain ONLY to the extent money received > the partner’s partnership basis.
  a. Relief from liabilities = **money.
  b. Gain is capital EXCEPT **for gain attributable to unrealized receivables and substantially appreciated inventory.
  c. If property other than money is received, gain is NOT recognized until disposition of the property.
• Partner recognizes loss only upon complete liquidation of a partnership interest AND receipt of only money, unrealized receivables, or inventory