R4- Partnership Taxation Flashcards
True or false? Partnerships are a taxable entity.
False.
Income and expenses flow through to the partner to be taxed via a Form K-1.
When exchanging property for a partnership interest; how is gain or loss recognized?
- Neither gain nor loss is recognized in an exchange of property for a partnership interest.
- Partnership gets the Contributor’s Basis
- It is a non-taxable event.
What is a partner’s Initial basis in partnership property?
-The basis of the property that was contributed
or
- Exchanged for the partnership interest.
When services are exchanged for a partnership interest; how is this treated for tax purposes?
It is a taxable event; treated the same as compensation for the services.
The taxable income equals the % of partnership interest received times the FMV of the partnership.
i.e. the FMV of the interest received is the taxable income for the service provider.
What is the partner’s basis in a partnership when they provide a service in exchange for the interest?
The amount of taxable service revenue provided by service provider.
What is the holding period of an asset that has been contributed to a partnership?
The partnership inherits the holding period of the asset contributed.
The exception of Sec. 1231 inventory:
- The holding period begins when contributed.
What is the tax treatment of startup costs for a partnership?
Tax treatment is the same as that of an individual taxpayer.
However syndication fees are not deductible or amortized.
What deductions are subtracted from gross revenues to arrive at partnership income?
COGS
Wages - except for partners
Guaranteed payments to partners
Business bad debt (if on accrual basis)
Interest paid
Depreciation (except section 179)
Amortization (Startup costs; goodwill; etc)
How are partnership losses taken on an individual’s return?
Losses cannot be taken beyond a partner’s basis in the partnership
Losses in excess of basis are carried forward until basis is available, Indefinitely
When are guaranteed payments to a partner includable in taxable income?
They appear in partner’s income during the year in which the partnership’s fiscal year CLOSES.
How are partner benefits paid by the partnership treated?
Health insurance; life insurance and other benefits paid on behalf of the partner are treated as:
- Guaranteed payments
& - Are includable as self-employment income.
How is net self-employment income from a partnership interest calculated?
Partner’s % share of ordinary income from partner’s K-1
+ Guaranteed payments
- Partner’s % share of section 179 expense from K-1
= Self-employment income (subject to SE tax)
In general; what is a partner’s basis in partnership property purchased?
- Basis of goods exchanged
or - For services exchanged is FMV of partnership interest received.
If purchased; purchase price less liabilities incurred = basis.
For a gifted interest in a partnership; gift basis rules apply.
Which items are not deductible on Schedule K of form 1065?
Foreign tax paid
Investment interest expense
Section 179 expense
Charitable contributions
Mnemonic: IFC179
Which items are not counted as income on Schedule K of form 1065?
Passive Income
Portfolio Income
1231 Gain or Loss
Mnemonic: PP1231
What items DECREASE partnership basis?
- Money distributed
- Adjusted basis of property distributed
- Partner’s share of ordinary losses
- Partnership is relieved of a liability
(considered a distribution)
What INCREASES partnership basis?
- Partnership getting a loan
- Capital contributions
- Ordinary income
- Capital gains
- Tax-exempt income
How do liabilities either INCURRED or RELIEVED affect a partner’s basis in a partnership?
If the partnership gets a loan; this INCREASES basis.
If partnership is relieved of a liability; this DECREASES basis.
How do guaranteed payments affect partnership basis?
They do not affect basis- they are already included in ordinary income; which affects basis.
- Tax Deductible
What is the order in which basis is adjusted in a partnership?
- Increase basis (all items; including tax-exempt income)
- Distributions
- Losses (limited to basis)
How is the taxable year of a partnership determined?
-It must be the same as 50% of the partners
and
- Use the same tax year for 3 years once adopted.
How does death of a partner affect the partnership’s taxable year?
The taxable year closes with respect to the decedent partner’s interest ONLY.
When CAN’T a partnership use cash basis?
- They have inventories
- Partnership is a tax shelter
- Has a corporate partner
- Gross receipts are $5 Million or more
Exception: If gross receipts are $1 Million or LESS and Partnership maintains inventories; Cash method is ok.
When does a partnership terminate?
- There is less than 2 partners
- 50% of the partnership interests sell within a 12 month period: IMMEDIATELY terminates.
- Operations Cease
How is gain or loss on sale of a partnership interest calculated?
Amount realized on sale
- basis in partnership interest
= Gain or Loss
What is the new basis of a partnership interest sold?
Capital account
+ Liabilities assumed
= Basis
How is the sale of non-capital (Hot Assets) partnership property treated?
As ordinary gain/loss.
HOT ASSETS:
- Unrealized receivables (Cash basis)
- Appreciated inventory
- Recapture Income
How is a partner’s share of an ordinary gain calculated?
FMV of Assets (non-capital)
- Adjusted basis of assets
= Ordinary gain
x Partner’s % interest
= Partner’s share of gain
What is the order of basis reductions for distributions from a partnership?
- Money distributed
- Adjusted basis of unrealized receivables and inventory
- Adjusted basis of other property
Note: Only MONEY distributions will trigger a gain in a partnership distribution.
When can a LOSS occur in a partnership distribution?
Only in a liquidating distribution.
What are the requirements for recognizing a gain in a partnership liquidating distribution?
- Money was distributed
- Unrealized receivables were distributed
- Appreciated inventories were distributed
Otherwise; no loss recognized.
No gain or loss will be recognized by a partnership upon?
- Distribution of property in return for a partnership interest
What are the Exceptions to Nonrecognition of Gain?
- Capital Interest acquired for Services Rendered (FMV) [Ordinary Income]
- Property subject to a Excess Liability
[Taxable boot & gain to the partner]
The Partner’s Initial Basis is Calc. by?
+Cash- amt contributed
+Property- Adjusted Basis (NBV)
(Liabilities)- Incoming partner’s Liabilities assumed by other partner’s is a reduction
+Services- FMV & taxable to incoming partner
+Liabilities- other partners Liabilities assumed by incoming partner
When a Partner contributes property with a FMV that is higher or lower then the Adjusted basis, what exists at the date on contribution?
- A Built-In Gain/ Loss
Upon the sale of a property with a Built-in G/L, must be?
- Specially-Allocated to the contributing partner
When is a Partnership’s tax return due & their Fiscal Year?
- Return: April 15th
- Fiscal: 3-month deferral (Oct/Nov/Dec) is the MAX. permitted
What are the Effects of Partnership Termination?
- Deemed distribution to remaining partners & purchaser
- Hypothetical recontribution of assets to a new partnership
What are the limitations for transactions between a Partner & Partnership?
- Related Party Loss (WRaP) is Disallowed
~Over 50% interest - Related Party Gain is Ordinary Income
Is Income Taxable & the Basis Impact?
- Taxable
- Basis Increases
Is Withdrawals Taxable & the Basis Impact?
- Nontaxable
- Basis Decrease
Tax Elections that affect the calc. of Taxable Income are made by?
- The Partnership
dep. methods, acct methods
When does the partnership recognize the Cancellation of Debt?
- When a Partnership transfers a capital/profits interest in the partnership to a creditor in satisfaction of partnership debt
What are the 3 ways a partner may liquidate a partnership interest?
- Complete Withdrawal
- Sale of Partnership interest
& - Retirement/Death
Payment for a Partnership Interest Assets with Retirement/Death results in?
- Payments results in Capital Gain/Loss
How is adjusted partnership basis calculated?
Beginning partnership basis \+ Capital contributions \+ Share of ordinary partnership income \+ Capital gains \+ Tax-exempt partnership income (DON'T FORGET!) = Ending partnership basis
In a Nonliquidating Land distribution, the Partner takes which basis?
- The Partner takes on the Partnership’s basis of assets
- Can’t exceed the partner’s interest in the Partnership
