Partnerships Flashcards
What are the basics of partnerships?
Partnerships are not a legal (taxable) entity
Income and Expenses flow through to the Partner via a Form K-1
Is property for partnership interest exchange a taxable event?
No, not taxable. No gain or loss recognized
What is the partner’s basis?
Basis of property contributed
Exception: When property has a liability that exceeds basis Capital Gain
Ex. $4,000 basis with a $6,000 mortgage for a 20% interest $4,000 ($6,000 x 80%) $800 Capital Gain
Are services for partnership interest a taxable event?
Yes, treated the same as compensation
Formula for services for partnership interest exchange
% of partnership interest
x FMV of partnership
= Taxable Income
What becomes the partnership basis for services for partnership interest?
Taxable income
What is the partnership-holding period of an asset?
Inherits holding period of asset contributed
What is the exception to the partnership holding period of an asset?
Inventory - holding period begins when contributed
What is the tax treatment for startup costs for a partnership?
same as that of an individual taxpayer
Are partnership startup syndication fees (preparing offering materials) deductible and/or amortizable?
No
What are the deductions to arrive at partnership income?
(Except for partners)
(Accrual basis only)
(payments to partners are OK)
(except 179)
= Partnership Income
How is partnership losses treated?
- Cannot be taken below basis
- Loss is carried forward until basis is available
Example: $2,400 Beginning Basis: $200 Plus Income: Minus Ordinary Loss: $0 $400 Loss gets carried forward until basis is available
When do guaranteed payments appear in partner’s income?
During year in which FY closes
Ex 6/1/14-5/31/15 Fiscal Year; even if payment was received in 2014, it is income on the 2015 individual return
What are partnership benefits?
Health Insurance
Life Insurance
Treated as guaranteed payments and are SE income
Formula for SE income subject to SE tax
% Share of Ordinary Partnership Income (Loss) from K1
+ Guaranteed Payments
What is the partner’s basis from property contribution?
Property’s original basis
What is the partner’s basis from compensation for services?
FMV of % of partnership ownership
What is the partner’s basis from purchase of partnership interest?
Amount of purchase
What is the partner’s basis from partnership interest by gift?
Gift Basis rules apply
What are items not deductible on Schedule K, and flow to partner’s K-1?
o Investment Interest Expense o Foreign Tax Paid o Charitable Contributions o 179 Expense Mnemonic: IFC179
What are items not counted as income on Schedule K?
Passive Income
Portfolio Income
1231 G/L
Mnemonic: PP1231
PARTNERSHIP BASIS CALCULATION
Beginning Partnership Basis \+Capital Contributions \+Share of Ordinary Income \+Capital Gains \+Tax-Exempt Income (don't forget this) =Ending Partnership Basis
What is the partnership basis decreased by?
Money Distributed
Adjusted Basis of Property Distributed
Share of Ordinary Losses
Partnership is relieved of a liability (considered a distribution)
What is the partnership basis increased by?
Partnership getting a loan
What is the order of adjustment to basis?
Increase basis in share of liabilities
Increase basis from all income items - including tax-exempt income
Decrease basis for distribution
Decrease basis for losses (limited to basis)
Gains are always allowed in related-party transactions
o 33% partner sells property to a partnership at a
$6,000 gain
o Partner recognizes a $6,000 capital gain on K-1
How will a 50% or more partner who contributes capital gain property to partnership, who in return won’t use it as capital gain property?
treats the gain as ordinary and so will the partnership
What is the partnership taxable year?
Must be the same as 50% of partners and use the same tax year for 3 years
What is the tax effect of the death of a partner?
Taxable year only closes with respect to partner and their partnership interest
When can a partnership NOT use cash basis?
Partnership has inventories
Partnership is a tax shelter
Corporation is a partner
Gross receipts of $5 Million or more (even though they carry no inventory)
Gross receipts of $1 Million or less AND maintains inventory is OK for Cash Method
When does a partnership terminate?
- When less than two partners
2. When 50% of partnership interest sells within 12 month period - terminates IMMEDIATELY
What happens from the sale of partnership interest?
Results in a Capital Gain/(Loss)
Amount Realized – Basis in Partnership = Gain/(Loss)
Basis = Capital Account + Liabilities Assumed
Any assets sold that are not capital in = Ordinary Gain
o Unrealized Receivables
o Appreciated inventory
Formula for partner’s share of ordinary gain
FMV of Assets (non-capital)
=Ordinary Gain
x Partnership Interest %
= Partner’s share of ordinary gain
Note: Partnerships recognize NO G/L on a Distribution
What is the DISTRIBUTION: ORDER OF BASIS REDUCTION?
- Money received
- Adjusted basis of unrealized receivables and inventory
- Adjusted basis of other property
Note: Only MONEY distributions will trigger a gain in a partnership distribution
When can a loss occur for a partnership?
In a liquidating distribution
What are the requirements for a loss to be recognized in a partnership?
- Money was received
- Unrealized receivables received
- Appreciated inventories received
Otherwise, no loss
