R4- Partnership Taxation Flashcards
The objective of this deck is to understand all the aspects of partnership taxation for REG Exam.
Partnership Formation
What is the taxable effect upon formation of partnership?
General Rule: No gain or loss is recognized on contribution of property to partnership
Partnership Formation
What is the Exception to the general rule of no gain or loss on formation of partnership?
- if capital interest is acquired for services rendered - value of services is ordinary income to partner @ FMV
- If property subject to excess liability- if property has liability, and interest exceeds liability- it is taxable to the partner
Partnership Formation
What is the basis of Contributing partner’s interest?
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
Partnership Formation
What happens when Property is subject to excess liability?
if property has liability, and interest exceeds liability- it is taxable to the partner as taxable gain
Partnership Formation
What is the holding period of such property?
- If such property was Sec 1231 assets- Rollover holding period
- If property was Ordinary Asset- holding period begins on the date of contribution to the partnership
Partnership Formation
What is the effect of subsequent transactions on partner’s basis?
Contribution - will increase basis
Withdrawls- will decrease basis
Partnership Formation
What is the effect of partnership income/loss on basis?
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
Partnership Formation
What is the Special Allocation- contributed appreciated or built-in loss Property?
- 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
Partnership Formation
What is the partnership’s basis for contributed property?
NBV
Contributor’s basis or carryover basis
plus any gain recognized by the incoming partner, if a special election is made
Partnership Operations
What is the partner’s basis formula?
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
Partnership Tax Returns
What are requirement for partnership tax returns?
Form 1065
information return including Schedule K and K1
What is the accounting period of partnership?
Calendar Yr
Partnership return is due on April 15
Fiscal Yr- 3 mnth deferral is permitted
i.e. Oct, Nov, Dec
When does partnership terminate?
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
What is the effect of termination?
a. deemed distribution to remaining partners and purchaser
b. hypothetical recontribution fo assets to a new partnership
Transaction between partner and partnership
Partner Not acting in capacity of partner
a. Related Party Loss is disallowed (WRaP)
b. Related party gain is ordinary income
Taxable Income in Partnership?
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
What happens to losses of partnership?
Losses are limited to basis
Carryforward when basis becomes available
Partner may be subjected to passive loss limitations
What are guaranteed payments?
- 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
What are the rules for Retirement Payments?
Received by the retiring partner not as liquidation
Ordinary Income to receiver
Deduction for partnership
Who makes the elections for depreciation and accounting methods i.e. tax elections?
Partnership (Not Partner)
What the rules for organizational expenditures and startup costs?
5000 Expense
Over 5000 amortize over 180 Months
Rules for syndication costs?
Costs to raise money
no deductible
How do you calculate Cancellation of Debt Income?
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
Reporting of Partnership Income and Losses
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
Reporting Partnership Losses
Limited to Basis
Non Liquidating distributions
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
Liquidating Distributions: Complete Withdrawal
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
Liquidating Distributions: Complete Withdrawal
Gain Recognized
Exception
The partner recognizes gain to the extent of money received exceeds the partner’s basis in the partnership
Liquidating Distributions: Complete Withdrawal
Loss Recognized
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
What is the Rule difference between liquidating and non liquidating
Withdrawal Basis Stopping Point
Nonliquidating NBV Asset Stop at zero
Liquidating Partnership Int. Must Zero out
Sale of Partnership Interest - Liquidation
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
Capital Gain or Loss Calculation
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
Exception to Capital Gain Rules
Ordinary Income, Not Capital Gain
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
Retirement or Death of Partner
- Payment for a partnership interest- results in capital gain or loss
- Other Payments- payments are for income, ordinary income, whenever it may be paid
- Proration of partnership interest and losses
