Partnerships Flashcards
What are the rules in forming partnerships?
- All partners have unlimited liability
- Tax free exchange for cash/prop (no 80% rule!)
- C/o basis, c/o holding period
- Services taxable at FV interest rec’v >Paid for interest in p/s
- Holding period for cap assets (or 1231) INCLUDES period held by partner, all other prop period starts when acquired
Rules for guaranteed payments
It’s an ordinary expense to the p/s, but a separately stated item to the partner (flows to K-1) bc we don’t want to bury the payment within a loss
Calc for ending outside basis
Initial outside basis \+/- Income/loss \+ Muni bond interest \+/- Separately stated items (Guaranteed payment doesn't reduce basis) - Distributions rec'v from p/s \+ Your % of p/s liabilities - Liabilities contributed to the p/s = End outside basis * expenses not deductible in computing taxable income and not properly chargeable to capital account reduces basis
Rules when basis is reduced below zero
Basis can never go below zero!
- If loss would reduce basis below zero, that portion is not deductible
- If distribution reduce basis below zero, either adj basis of dist asset or if cash, report gain
- If contributed asset, report gain for amount below zero, and basis goes to zero
Rules for picking up basis in a non-liquidating partnership property distribution
No G/L
New basis is the lower of inside or outside basis
**Always reduce outside basis by any money distributed in the same transaction first
Rule for picking up basis in a liquidating property distribution
No G/L
Always pick up for outside basis
* If dist cash and property, cash reduces basis first remaining goes to asset
What are loss limitation rules for partners?
Loss cannot exceed partner’s adjusted basis
Limited to “at-risk”
Passive loss rules
Calc of amount realized and G/L when partner sells their interest
Cash and property rec'v \+ Relief from debt = Realized - Partner's outside basis = Gain/loss
What is the exception to calculating the G/L from sale of a partner’s interest?
The gain is recognized as ordinary income to the extent of unrealized ordinary income (hot assets, A/R Inventory) at time of sale, and the rest is capital gain.
P/s terminates for tax purposes when any of the following occurs:
- Business/financial operations are discontinued
- Business is reduced to one partner
- 50% or more of p/s interest change hands within 12 month period
Which elections are made at the partner level?
- Cost or percentage depletion for oil and gas wells
- Reduction of basis of depreciable property when excluding income from discharge of indebtedness
- Take a deduction or credit for foreign taxes paid
What elections are made by the partnership?
- Taxable year and accounting method
- Cost recovery methods and assumptions
- Treatment of research and development costs
- Amortization of organization costs and start-up costs
The rules for liquidating distributions for a partnership
Receives cash or marketable securities in excess of the partner’s adjusted basis, then gain is recognized on that excess.
If a partner receives unrealized receivables, or inventory in a liquidating distribution, a loss may be recognized by the partner equal to the difference between FMV and the partner’s basis (ordinary for hot assets)
If only other property is received, then no loss may be recognized.
When are losses not allowed in property transfers
Other than for an interest in the partnership, not allowed when directly or indirectly between a partnership and a person whose direct or indirect interest in the capital or profits of the partnership is more than 50%
Rule used when basis of distributed property is different than basis of partner in liquidating and non-liquidating distributions
Non-liquidating (lower of inside/outside):
Partner basis>asset basis=use asset
Partnerasset=partner
Partner
