Partnerships Flashcards
What are the partnerships dates
Due 3/15
(like S corp)
extension - 5 months extension
Tax years must be the same as the majority of the partners
What is the big difference with partnerships
Everything is ‘At risk”
You have UN-Limited liability
What is the filing form for partners
1065
What is net outside basis
This is the partners basis in the partnership that is viewed from an outside perspective. This is the PARTNERS basis
What is the inside basis
This is the basis amount of the assets inside the partnership TO the partnership. This is the PARTNERSHIPS basis in the asset
What is a guaranteed Payment
This is sorta like a salary in that the partner is guaranteed to get regardless of income to the partnership
It is ordinary income to the partnership and to the partner
Is a partnership created formal or informal
informal - so everything is considered at risk
What does a partner basis include
your percent of the liabilities
Do you need to worry about 80% or more?
No - not in a partnership
How are Guaranteed Payments separately stated
Guaranteed Payments are part of ordinary income BUT are separately stated on that Partner s K-1
Calendar rules for partnership
Partnership must adopt the same tax year as that of the partners or a majority
Usually calendar year
What are the rules when having transactions between partnerships
- they are considered at two separate entities
The exception is if one partner owns a majority (60%)
- They can’t have losses from sales of property between partners.
- They can have gains - ordinary income
Cab your basis every go below 0
NO - never below zero
The rest is suspended
What are the rules on selecting a tax year - partnerships
The general rule is to adopt a tax year that coincides with the tax year of a majority of the partners
Generally need to have a business purpose for selecting abetter tax year
What is IRC Section 444
Under section 444 a partnership can select a different tax year as long as it is within 3 months deferral period.
Under 444 there does not have to be any business purpose to elect an alternative tax year
In a complete liquidation of a partner how do you calculate the basis of “in Kind” property
The complete liquidation means that the partner’s basis must be zero.
Step one is to reduce basis by and cash in the transaction 10 - 5 = 5
Step 2 is to reduce the the basis to zero by the property transaction
You can t have a gain or loss on property distribution so if the inside basis is more ( 10) the the result is a capital gain to the partner.
The result is that the property distributed is equal to the basis of the partners interest after subtracting and cash distributed at the same time
What are the rules on at - risk amounts
When a partnership has a business loss for the year each partner can only deduct their share of the loss to the extent of their basis
The at risk amount is usually the partner’s basis less their partner percentage of any non-recourse debt
This is because non-recourse debt make s the partner not ultimately liable for the debt -
So they are not really at risk for their share of the debt
Can partnerships or S corps claim a NOL
No - they can’t
Pass through
What is a guaranteed payment
It is made without regard to partnership income
It WOULD include a salary for services rendered by the partner
NOT include percentage interest in profits
Is a partner at risk for a non recourse loan?
No -
Recourse loans increase a partner’s basis but non recourse loans do not
When you receive payment for services in the form of property an ownership - was is the tax implications for you
Property and % of partnership is valued at FMV and that is added to your gross income
When you have capital gains does this count as income to a partner
Yes it does
guaranteed payments
ordinary income
capital gains
are all reported as income to a partner on their K-1
Sales of partners’ assets to the partnership at guaranteed amounts regardless of market values.
This is a guaranteed payment
Payments of principal on secured notes honored at maturity.
Principle payments are debt obligations
Sales of partners’ assets to the partnership at guaranteed amounts regardless of market values.
These are not considered guaranteed payments
Net long term capital gains
Distributions of net long-term capital gains earned by the partnership are dependent on their being earned and are not guaranteed payments to partners.
Section 444 does the rule apply to general and limited partnerships
Yes - it applies to both
When you render service fore a % of a partnerships - who do you do it
You take the Fair Market Value on the day you come into it. and then take the percentage
This will equal the amount of ordinary income you will get
5% of 170,000 = 8500 of ordinary income
which increases a partners base - recourse or non recourse loans
recourse loans - YES increase a patterns bases
Non recourse loan - does NOT increase a partners base and
When a partner get land as a distribution what is the holding period that the partner recognizes
They assume the holding period of the company.
If the company held it for 5 years, then the partner assumes that holding period as well
Same with carryover basis
Can you every ahem a negative basis in a company
Nope - you can only have 0 and the rest is held on for future when you do have basis
What happens when a partnership terminates for tax purposes
When a partnership terminates for tax purposes, but the business continues, it is treated as a total distribution of the assets to the partners followed by a recontribution of all the assets to a new partnership.
When is a partnership considered terminated
A partnership terminates when either the partnership ceases conducting business or over 50% of the partnership’s ownership interests are sold within a 12-month period.
This also means when a parter’s share change hands - so simply selling to a third party counts as termination grounds
when a partner receives an interest in exchange for services rendered - how do you calculate the the amount you will include in the partners income
If you get interest in return for services it is as if you earned that percentage
so if you get 10% of the company then the income that you have to claim is based on the FMV of the assets in the business
if FMV is 1000,000 then 10% is 10,000
10,000 is how much you have to include in gross income
What method of depreciation must a partnership use
Any that is approve by IRS
What happens when you have losses in excess of at risk amounts
Excess losses can be carried forward to subsequent years with no time limit, and deducted when the “at risk” amount has increased.
What is the at risk amount
The amount “at risk” includes the cash and adjusted basis of property contributed by the taxpayer, and the liabilities for which the taxpayer is personally liable (this excludes non-recourse debt).
For real estate activities it includes qualified non-recourse debt secured by the real property used in the activity.
Hoe do you determine how much deductible loss you can take in a partnership
A deductible loss is limited to the partners adjusted basis in the partnership
Basis is increased capital gains and decreased by cash distributions
Your basis is your at risk amount -
you can take losses up to your at risk amount and then can carry any remaining forward until you have sufficient basis to deduct the losses
Is a sole proprietorship a pass through entity
No - it does not file its own tax return
How do you define a pass through entity
It files a tax return, but does not pay tax
LLC
LLP
S corp
Partnerships
What are the names of owners:
LLC
C corp
S corp
Partnership
LLC - members
Partnership - general partner
S corp - shareholder
C - corp - shareholder
What is a cash distribution from a partnership considered to an individual
It is a return of capital
It reduces you basis in the partnership, but is NOT considered income
what costs can and can not be deductible as organizational expenses
legal fees - yes
No accounting fees to prepare representation in offering material, No costs associated with selling partnership interests
5000 per year - reduced if above 50K amortized over 180 months
Can a nonliquidating cash distribution may reduce the recipient partner’s basis in his partnership interest below zero.
no parters base can NEVEr go below zero - eater in liquidating or non liquidating distribution
A nonliquidating distribution of unappreciated inventory reduces the recipient partner’s basis in his partnership interest.
True
In a liquidating distribution of property other than money, where the partnership’s basis of the distributed property exceeds the basis of the partner’s interest, the partner’s basis in the distributed property is limited to his predistribution basis in the partnership interest.
True
Gain is recognized by the partner who receives a nonliquidating distribution of property, where the adjusted basis of the property exceeds his basis in the partnership interest before the distribution.
False
your partnership basis becomes 0
basis in property is same as your basis in partnership at the time
Will non liquidating distributions of cash in excess of the partner’s basis result in a gain
Yes - they are the only type that will result in a gain
In a nonliquidating distribution of inventory, where the partnership has no unrealized receivables or appreciated inventory, the basis of inventory that is distributed to a partner cannot exceed the inventory’s adjusted basis to the partnership.
true
The partnership’s nonliquidating distribution of encumbered property to a partner who assumes the mortgage, does not affect the other partners’ bases in their partnership interests.
False
all partners share will be effected by the removal of the mortgage
This includes the one partner who is assuming the mortgage
Tax Treatment?
Partnership made a proportionate cash distribution
Partnership made a proportionate cash distribution
Tax Treatment?
Partnership sold depreciable property at a gain in excess of the depreciation allowed on the property
Partnership sold depreciable property at a gain in excess of the depreciation allowed on the property
property old at a gain to the extent of depreciation it is RECAPTURED as ordinary income
The rest is 1231 Gain and passes to the partner on their tax return
Tax Treatment? Partnership claimed section 179 deduction for depreciable property purchased during the year
Treated as separately stated item by the partnership and potentially deductible by the partners.
Tax Treatment?
Partnership made cash contributions to qualifying charities
Treated as separately stated item by the partnership and potentially deductible by the partners.
Tax Treatment?
Partnership sold an investment held for less than one year at a gain
Treated as separately stated item by the partnership, taxable to the partner.
Tax Treatment? Partnership paid for rental of office space
Deductible by the partnership in arriving at partnership ordinary business income.
Tax Treatment?
Partnership paid outside consultant for services rendered
Deductible by the partnership in arriving at partnership ordinary business income.
Tax Treatment? Partnership made a cash contribution to a foreign charity
Partners are not entitled to a deduction and decrease their basis in the partnership.
Charity is only deductible if you make it to a US charity
It is not deductible
It is treated as if it were a distribution to a partner
A nonliquidating cash distribution may reduce the recipient partner’s basis in his partnership interest below zero.
False
A nonliquidating distribution of unappreciated inventory reduces the recipient partner’s basis in his partnership interest.
True
In a liquidating distribution of property other than money, where the partnership’s basis of the distributed property exceeds the basis of the partner’s interest, the partner’s basis in the distributed property is limited to his predistribution basis in the partnership interest.
true
Gain is recognized by the partner who receives a nonliquidating distribution of property, where the adjusted basis of the property exceeds his basis in the partnership interest before the distribution.
False
only can have a gain if you get more cash than your basis
In a nonliquidating distribution of inventory, where the partnership has no unrealized receivables or appreciated inventory, the basis of inventory that is distributed to a partner cannot exceed the inventory’s adjusted basis to the partnership.
true
The partnership’s nonliquidating distribution of encumbered property to a partner who assumes the mortgage, does not affect the other partners’ bases in their partnership interests.
false
between a C corp, and S corp and a partnership - which one has restrictions on who can be an owner
Only S corp - a corp can not be an owner of an s corp
How are income and losses allocated in a partnership
With Pships, income and losses are allocated based on the ownership agreement, and special allocations are permitted.
How are S corps allocation based
S corps are based on a per share per day ownership basis
which of the three have the least protection
General Pships have the least protection because there is unlimited liability for the owners; whereas C Corps and S Corps have the ability to limit liability since the owners are liable only to the extent of their investments
S corps - what qualifies
However, in S Corps there can only be one class of ownership, and not more than 100 owners of which none are nonresident aliens.
What is the partners tax basis used for
determining the partner’s gain or loss on subsequent sale of their partnership interest.
what is the difference between how a partnership and s corp compute their partner basis
With a partnership, the partners add their proportionate share of the partnership liabilities to their net adjusted basis in the assets they contributed.
how do s corps recognize gains or losses
An S corporation will generally recognize gain or loss on the distribution of property as if it were sold for its fair market value.
how are the gain an losses handled in an s corp
Any gain or loss recognized by the S corporation will flow-through to the shareholders’ tax returns and increase or decrease their bases in their stock.
When can you receive capital gains in an s corp
Capital gain will be recognized by a shareholder who receives property with a fair market value in excess of the shareholder’s basis in the asset.
do partnerships recognize gains or losses
A partnership generally will not recognize a gain or loss on the distribution of property.
How do you allocate non recourse loans to partners
it is usually based on the partners profit percentage
Are recourse loans allocated to limited partners
no recuasse they do not share the liability for repayment so the full amount is given to the partner with the recourse loan
