R4- Partnership Taxation

Question 1

Partnership Formation

What is the taxable effect upon formation of partnership?

Answer 1

General Rule: No gain or loss is recognized on contribution of property to partnership

Question 2

Partnership Formation

What is the Exception to the general rule of no gain or loss on formation of partnership?

Answer 2

1. if capital interest is acquired for services rendered - value of services is ordinary income to partner @ FMV
2. If property subject to excess liability- if property has liability, and interest exceeds liability- it is taxable to the partner

Question 3

Partnership Formation

What is the basis of Contributing partner’s interest?

Answer 3

a. Cash- Contributed
b. Property @ NBV
c. WE PUT IN i.e. liabilities taken over by other partners
d. Services @ FMV
e. Liabilites- WE TAKE ON which other partners bring in

Question 4

Partnership Formation

What happens when Property is subject to excess liability?

Answer 4

if property has liability, and interest exceeds liability- it is taxable to the partner as taxable gain

Question 5

Partnership Formation

What is the holding period of such property?

Answer 5

1. If such property was Sec 1231 assets- Rollover holding period
2. If property was Ordinary Asset- holding period begins on the date of contribution to the partnership

Question 6

Partnership Formation

What is the effect of subsequent transactions on partner’s basis?

Answer 6

Contribution - will increase basis

Withdrawls- will decrease basis

Question 7

Partnership Formation

What is the effect of partnership income/loss on basis?

Answer 7

a. Increase by his pro rata share of income and increase of partnership liabilities
b. Decrease by his pro rata share of losses and decrease in partnership liabilities

Question 8

Partnership Formation

What is the Special Allocation- contributed appreciated or built-in loss Property?

Answer 8

• When a partner contributes property with FMV higher or lower than NBV
• a built-in gain or loss exists
• upon subsequent sale of the property
• the built-in gain or loss has to be specially allocated
• to the contributing partner

Question 9

Partnership Formation

What is the partnership’s basis for contributed property?

Answer 9

NBV
Contributor’s basis or carryover basis

plus any gain recognized by the incoming partner, if a special election is made

Question 10

Partnership Operations

What is the partner’s basis formula?

Answer 10

B- Beginning Capital Account-Cash, NBV Asset, Services @ FMV
A+All Income- Ordinary, Capital and Tax Free
S- All Losses, Partner may take a partnership loss as a tax deduction up to his/ her basis
- Withdrawals, Property distribution: Reduce Capital account by the NBV of the distributed property, cannot go below zero
E= Ending Capital Account
+% Recourse Liabilities
=Year End Basis

Basis= Capital Account + Partner’s Share of Liabilities

Question 11

Partnership Tax Returns

What are requirement for partnership tax returns?

Answer 11

Form 1065

information return including Schedule K and K1

Question 12

What is the accounting period of partnership?

Answer 12

Calendar Yr
Partnership return is due on April 15
Fiscal Yr- 3 mnth deferral is permitted
i.e. Oct, Nov, Dec

Question 13

When does partnership terminate?

Answer 13

a. When operation ceases
b. 50% or more of the total partnership interest in both capital and profits is sold or exchanged within 12 month period
c. there are less than 2 partners

Question 14

What is the effect of termination?

Answer 14

a. deemed distribution to remaining partners and purchaser

b. hypothetical recontribution fo assets to a new partnership

Question 15

Transaction between partner and partnership

Partner Not acting in capacity of partner

Answer 15

a. Related Party Loss is disallowed (WRaP)

b. Related party gain is ordinary income

Question 16

Taxable Income in Partnership?

Answer 16

A Partner must include his share of partnership income
even if not received
in his retrun for his taxable year within which the taxable year of the partnership begins

Question 17

What happens to losses of partnership?

Answer 17

Losses are limited to basis
Carryforward when basis becomes available
Partner may be subjected to passive loss limitations

Question 18

What are guaranteed payments?

Answer 18

• Guaranteed Payments are reasonable compensation paid to a partner for services rendered without regard to partnership income ratio
• They are tax deductible to the partnership
• Ordinary Income for the receiving partner

Question 19

What are the rules for Retirement Payments?

Answer 19

Received by the retiring partner not as liquidation
Ordinary Income to receiver
Deduction for partnership

Question 20

Who makes the elections for depreciation and accounting methods i.e. tax elections?

Answer 20

Partnership (Not Partner)

Question 21

What the rules for organizational expenditures and startup costs?

Answer 21

5000 Expense

Over 5000 amortize over 180 Months

Question 22

Rules for syndication costs?

Answer 22

Costs to raise money

no deductible

Question 23

How do you calculate Cancellation of Debt Income?

Answer 23

When a partnership transfers a capital or profits interest
to a creditor
in satisfaction of debt
the partnership recognizes cancellation of debt income
the amount of income is the excess of amount of debt discharged over FMV of the partnership interest
transfers to the creditor

Question 24

Reporting of Partnership Income and Losses

Answer 24

K1
Individual partner report their share of income on Schedule E & 1040

3 items appear on all Form 1065,K and K1
Guaranteed Payments
Partners health insurance premiums reported as guaranteed payments
Retirement Plan Contributions Keogh Plan

Question 25

Reporting Partnership Losses

Answer 25

Limited to Basis

Question 26

Non Liquidating distributions

Answer 26

Like Bank Accounts
Non taxable
Property=NBV= Non taxable
Reduction limited to Partnership Basis
Stop at zero basis
Gain if excess cash
First Deduct Cash from Basis
Balance is Property

Question 27

Liquidating Distributions: Complete Withdrawal

Answer 27

a. Non-taxable Liquidaton
Beginning Capital Account
% Income up to withdrawal
% of Liabilities

=Remaining basis to be allocated to assets withdrawn
Zero out
To Get out

Question 28

Liquidating Distributions: Complete Withdrawal

Gain Recognized

Answer 28

Exception

The partner recognizes gain to the extent of money received exceeds the partner’s basis in the partnership

Question 29

Liquidating Distributions: Complete Withdrawal

Loss Recognized

Answer 29

The partner recognizes loss if only money, AR and inventory are received
and if the basis of the assets received is less than
partner’s adjusted basis in the partnership

Question 30

What is the Rule difference between liquidating and non liquidating

Answer 30

Withdrawal Basis Stopping Point
Nonliquidating NBV Asset Stop at zero
Liquidating Partnership Int. Must Zero out

Question 31

Sale of Partnership Interest - Liquidation

Answer 31

General Rule- Gain or Loss
The Gain or loss is measured by the difference
between the amount realized from the sale
and the adjusted basis of the partnership interest
If liabilities are transferred to the buyer,
they are part of amount realized

Question 32

Capital Gain or Loss Calculation

Answer 32

General Rule:
Beginning Capital Account
% Income  Up to Sale
Capital account @ Sale date
% Liabilities*
Adjusted Basis
*
Capital Gain or Loss

* Net to Zero
Amount Realized=
Cash
COD
FMV Property

Question 33

Exception to Capital Gain Rules

Ordinary Income, Not Capital Gain

Answer 33

Any Gain that represents partner’s share of Hot Assets is treated as Ordinary Income

Hot Assets:

a. AR- Cash Basis
b. Appreciated Property
c. Recapture income regarding depreciable assets

Question 34

Retirement or Death of Partner

Answer 34

1. Payment for a partnership interest- results in capital gain or loss
2. Other Payments- payments are for income, ordinary income, whenever it may be paid
3. Proration of partnership interest and losses