Partnerships

Question 1

Partnership tax information

Answer 1

• File a form 1065
• – information return only since its a flow through entity
• issues a K-1
• Tax year generally must be same as the partners or majority of partners
• Accounting is similar to S corps

Question 2

Partnership Start Up

Answer 2

• Informal creation since all partners have unlimited liability - everything is at risk
• Cash or Property = tax free exchange, carryover basis, carryover holding period
• Services - taxable at FMV of capital interest received

Question 3

Holding Period

Answer 3

• Capital Assets or Sec 1231 (noncurrent business) assets: includes period held by the partner
• All other property - when partnership interest acquired

Question 4

Outside Basis

Answer 4

• Partner basis in the partnership

Question 5

Inside Basis

Answer 5

• Partnership basis in its assets

Question 6

Basis in Asset received

Answer 6

• From a P/S distribution

Question 7

Guaranteed Payment

Answer 7

• Like a salary in an S corp
• • Taxable as ordinary income (subject to self employment tax)
• • Deductible to P/S as ordinary expense
• • Not based on income
• • Does not directly reduce partners basis

Question 8

Partnership Outside Basis Contribution

Answer 8

Initial Outside Basis
\+- % Income/Loss, Muni bond interest, separately stated items
- Distributions received from P/S
\+ Your % of P/S Liabilities
- Liabilities contributed to P/S
= Ending Outside Basis

• CANNOT GO BELOW 0, any distribution exceeding it is a gain

Question 9

Separately Stated Items

Answer 9

• Capital gains and losses (Limited on deductibiltiy of net capital losses)
• Section 1231 gains and losses (Classification of net gain as capital gain)
• Dividends and investment interest (Investment interest expense limitation)
• Passive activities (PAL limitations)
• Charitable contributions (Must itemize to deduct/ Up to 50% of AGI)
• Section 179 depreciation election (Dollar limit on use of election per year)
• Tax credits (Limited to tax liability)
• Guaranteed payments to partners

Question 10

Transactions between partner and partnership

Answer 10

• Generally are considered as occurring between two completely independent entities
• Losses from sales of property between the controlling parter and the partnership are not allowed
• Gains from the sale of property are characterized as ordinary income
• Applicable whether interest is owned directly or indirectly

Question 11

Partnership Distributions - Non-liquidating

Answer 11

• Normally reduces the partner’s basis in the partnership by the tax basis of the distributed asset in the partnership.
• Distribution in excess of the partners basis:
• – Cash Distributions: reported as a gain on partners individual return
• – Property Distributions: basis of the distributed asset in the hands of the partner is reduced to equal the partners basis in the partnership prior to the distribution (reduces basis to $0)
• if both cash and property, do cash first, remainder allocated to property

Question 12

Partnership Distributions - Liquidating

Answer 12

• Basis must be reduced to $0
• Basis in excess of distribution to be reported as a capital loss (cash, inv, unrealized receivables)
• Property distributions will always equal the partners basis before distribution
• if both cash and property, do cash first, remainder allocated to property

Question 13

Sale of Partnership Interest

Answer 13

• Sum of:
• • Cash and property received
• • • Relief from debt
• Normally the gain on sale reported by a partner is a capital gain
• If partnership has unrealized ordinary income assets (inventories and A/R = “Hot Assets”) at the time of sale, the partner has converter income that would have been ordinary to capital gains.
• Ordinary gain/loss for inventory and receivables, Capital gain/loss for everything else

Question 14

Limited Liability Company

Answer 14

• Taxed as a flow-through entity
• if one member, considered a “disregarded entity” and the activities of the LLC are reported on the individuals tax return on schedule C
• If multiple members, the entity is treated as a partnership and is required to file an informational 1065
• May chose to be taxed as a corporation by filing a form 8832
• LLC considered an entity that is separate from its owners. it may sue or be sued.
• Members’ liability is limited to the amount of their investments
• if a member leaves the llc, the business is required to be dissolved. Members are considered self employed.

Question 15

Limited Liability Partnership

Answer 15

• Not liable for misconduct or negligence of other partners
• obligations are generally the sole obligation of the partnership and not the partners being personally liable
• taxed similarly to a general partnership
• General partner - subject to both income tax and self employment tax
• limited partners share of an llp reported as passive income or loss