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REG > R4- Partnership Taxation > Flashcards

R4- Partnership Taxation Flashcards

1
Q

True or false? Partnerships are a taxable entity.

A

False.

Income and expenses flow through to the partner to be taxed via a Form K-1.

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2
Q

When exchanging property for a partnership interest; how is gain or loss recognized?

A
  • 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.
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3
Q

What is a partner’s Initial basis in partnership property?

A

-The basis of the property that was contributed
or
- Exchanged for the partnership interest.

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4
Q

When services are exchanged for a partnership interest; how is this treated for tax purposes?

A

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.

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5
Q

What is the partner’s basis in a partnership when they provide a service in exchange for the interest?

A

The amount of taxable service revenue provided by service provider.

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6
Q

What is the holding period of an asset that has been contributed to a partnership?

A

The partnership inherits the holding period of the asset contributed.

The exception of Sec. 1231 inventory:
- The holding period begins when contributed.

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7
Q

What is the tax treatment of startup costs for a partnership?

A

Tax treatment is the same as that of an individual taxpayer.

However syndication fees are not deductible or amortized.

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8
Q

What deductions are subtracted from gross revenues to arrive at partnership income?

A

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)

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9
Q

How are partnership losses taken on an individual’s return?

A

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

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10
Q

When are guaranteed payments to a partner includable in taxable income?

A

They appear in partner’s income during the year in which the partnership’s fiscal year CLOSES.

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11
Q

How are partner benefits paid by the partnership treated?

A

Health insurance; life insurance and other benefits paid on behalf of the partner are treated as:

  • Guaranteed payments
    &
  • Are includable as self-employment income.
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12
Q

How is net self-employment income from a partnership interest calculated?

A

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)

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13
Q

In general; what is a partner’s basis in partnership property purchased?

A
  • 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.

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14
Q

Which items are not deductible on Schedule K of form 1065?

A

Foreign tax paid
Investment interest expense
Section 179 expense
Charitable contributions

Mnemonic: IFC179

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15
Q

Which items are not counted as income on Schedule K of form 1065?

A

Passive Income
Portfolio Income
1231 Gain or Loss

Mnemonic: PP1231

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16
Q

What items DECREASE partnership basis?

A
  • Money distributed
  • Adjusted basis of property distributed
  • Partner’s share of ordinary losses
  • Partnership is relieved of a liability
    (considered a distribution)
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17
Q

What INCREASES partnership basis?

A
  • Partnership getting a loan
  • Capital contributions
  • Ordinary income
  • Capital gains
  • Tax-exempt income
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18
Q

How do liabilities either INCURRED or RELIEVED affect a partner’s basis in a partnership?

A

If the partnership gets a loan; this INCREASES basis.

If partnership is relieved of a liability; this DECREASES basis.

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19
Q

How do guaranteed payments affect partnership basis?

A

They do not affect basis- they are already included in ordinary income; which affects basis.

  • Tax Deductible
20
Q

What is the order in which basis is adjusted in a partnership?

A
  1. Increase basis (all items; including tax-exempt income)
  2. Distributions
  3. Losses (limited to basis)
21
Q

How is the taxable year of a partnership determined?

A

-It must be the same as 50% of the partners
and
- Use the same tax year for 3 years once adopted.

22
Q

How does death of a partner affect the partnership’s taxable year?

A

The taxable year closes with respect to the decedent partner’s interest ONLY.

23
Q

When CAN’T a partnership use cash basis?

A
  1. They have inventories
  2. Partnership is a tax shelter
  3. Has a corporate partner
  4. Gross receipts are $5 Million or more

Exception: If gross receipts are $1 Million or LESS and Partnership maintains inventories; Cash method is ok.

24
Q

When does a partnership terminate?

A
  • There is less than 2 partners
  • 50% of the partnership interests sell within a 12 month period: IMMEDIATELY terminates.
  • Operations Cease
25
Q

How is gain or loss on sale of a partnership interest calculated?

A

Amount realized on sale
- basis in partnership interest

= Gain or Loss

26
Q

What is the new basis of a partnership interest sold?

A

Capital account
+ Liabilities assumed
= Basis

27
Q

How is the sale of non-capital (Hot Assets) partnership property treated?

A

As ordinary gain/loss.

HOT ASSETS:

  • Unrealized receivables (Cash basis)
  • Appreciated inventory
  • Recapture Income
28
Q

How is a partner’s share of an ordinary gain calculated?

A

FMV of Assets (non-capital)
- Adjusted basis of assets
= Ordinary gain

x Partner’s % interest
= Partner’s share of gain

29
Q

What is the order of basis reductions for distributions from a partnership?

A
  1. Money distributed
  2. Adjusted basis of unrealized receivables and inventory
  3. Adjusted basis of other property

Note: Only MONEY distributions will trigger a gain in a partnership distribution.

30
Q

When can a LOSS occur in a partnership distribution?

A

Only in a liquidating distribution.

31
Q

What are the requirements for recognizing a gain in a partnership liquidating distribution?

A
  1. Money was distributed
  2. Unrealized receivables were distributed
  3. Appreciated inventories were distributed

Otherwise; no loss recognized.

32
Q

No gain or loss will be recognized by a partnership upon?

A
  • Distribution of property in return for a partnership interest
33
Q

What are the Exceptions to Nonrecognition of Gain?

A
  • Capital Interest acquired for Services Rendered (FMV) [Ordinary Income]
  • Property subject to a Excess Liability
    [Taxable boot & gain to the partner]
34
Q

The Partner’s Initial Basis is Calc. by?

A

+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

35
Q

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
  • A Built-In Gain/ Loss
36
Q

Upon the sale of a property with a Built-in G/L, must be?

A
  • Specially-Allocated to the contributing partner
37
Q

When is a Partnership’s tax return due & their Fiscal Year?

A
  • Return: April 15th

- Fiscal: 3-month deferral (Oct/Nov/Dec) is the MAX. permitted

38
Q

What are the Effects of Partnership Termination?

A
  • Deemed distribution to remaining partners & purchaser

- Hypothetical recontribution of assets to a new partnership

39
Q

What are the limitations for transactions between a Partner & Partnership?

A
  • Related Party Loss (WRaP) is Disallowed
    ~Over 50% interest
  • Related Party Gain is Ordinary Income
40
Q

Is Income Taxable & the Basis Impact?

A
  • Taxable

- Basis Increases

41
Q

Is Withdrawals Taxable & the Basis Impact?

A
  • Nontaxable

- Basis Decrease

42
Q

Tax Elections that affect the calc. of Taxable Income are made by?

A
  • The Partnership

dep. methods, acct methods

43
Q

When does the partnership recognize the Cancellation of Debt?

A
  • When a Partnership transfers a capital/profits interest in the partnership to a creditor in satisfaction of partnership debt
44
Q

What are the 3 ways a partner may liquidate a partnership interest?

A
  • Complete Withdrawal
  • Sale of Partnership interest
    &
  • Retirement/Death
45
Q

Payment for a Partnership Interest Assets with Retirement/Death results in?

A
  • Payments results in Capital Gain/Loss
46
Q

How is adjusted partnership basis calculated?

A 
Beginning partnership basis
\+ Capital contributions
\+ Share of ordinary partnership income
\+ Capital gains
\+ Tax-exempt partnership income (DON'T FORGET!)
= Ending partnership basis
47
Q

In a Nonliquidating Land distribution, the Partner takes which basis?

A
  • The Partner takes on the Partnership’s basis of assets

- Can’t exceed the partner’s interest in the Partnership

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