Partnerships

Question 1

What conditions would result in a partnership terminating?

Answer 1

• Cessation of partnership activities and liquidation
• When the partnership’s business activities no longer continue in partnership form
• When there are fewer than two partners

Question 2

How is a partner’s basis in a partnership determined?

Answer 2

+ Cash
+ Adjusted basis of property
- Liabilities (amount assumed by other partners)
+ FMV of services rendered (if applicable)
+ Liability - other partner’s liability assumed by the incoming partner
= basis

Question 3

How are partnership liabilities treated?

Answer 3

• The partner’s original basis is increased by the portion of the liabilities assumed by the partner, and this amount is equal to the partner’s percentage ownership in the partnership
• Partnership basis will increase in proportion to the partner’s economic loss percentage (risk) if the debt is recourse.
• Partnership basis may increase if the debt is nonrecourse, but there are limitations (beyond the scope of the exam).

Question 4

What are some features of LLCs?

Answer 4

• LLCs can select whether to be taxed as a partnership, corporation, or sole proprietorship.
• An LLC with at least two owners is taxed as a partnership unless an election is made to be taxed as a corporation.
• All LLC members generally have the right to amend the LLC operating agreement, provide input, and manage LLCs.
• An LLC cannot become a public company. It must convert to a corporation before issuing an IPO.
• A single-member LLC is considered a disregarded entity for federal income tax purposes and is treated as a sole proprietorship.

Question 5

What is the penalty for failure to file a partnership tax return?

Answer 5

The penalty for failure to file a partnership tax return is $200 for each month or part thereof (up to a maximum of twelve months) the return is late (or required information is missing) times the number of persons who are partners in the partnership at any time during the year.