R4 Partnership Taxation Flashcards
What is the initial basis of a partnership interest?
CASH = Amount Contributed
+ Property = Adjusted Basis (NBV)
- % (liabilities) Liabilities assumed by other partners
+ Services = FMV (and taxable to partner)
+ % Liabilities = Liabilities assumed by income partner
= Beginning capital account
What is the basis of contributed property to the PS?
The basis of contributed property to the PS is the partner’s basis increased by any gain recognized by the partner on the contribution.
State the HP for a partner’s interest?
The HP for a partner’s interest is equal to the HP of the property contributed if the property were a capital asset or a Section 1231 asset in the hands of the partner. If the property were an ordinary income asset (i.e. inventory), the HP starts on the date of contribution to the PS.
What is the formula for a partner’s basis in the PS interest?
Basis = Capital account + partner’s share of PS recourse liabilities
When does a PS cease to exist, for tax purposes?
- When operations cease
- When 50% or more of the total interest (capital & profits) in the PS is sold or exchanged within a 12 month period.
- When there are fewer than 2 partners (the PS becomes a sole proprietorship)
What is the treatment of guaranteed payments to a partner?
is a deduction on the PS tax return, and the payment flows through to the partners as part of ordinary business expense on the K-1.
Then, because the partner is considered an employee, the payment must be included as self-employment income on the partner’s return.
What is the limit on the destructibility if a PS loss to a partner?
A partner’s ability to deduct PS losses is first limited to the partner’s adjusted basis in the PS. Secondly, the loss deduction is limited to the partner’s “at-risk” amount. Finally, the passive activity loss limitations must be considered.
How are the PS income and losses reported?
- Net business income or loss
- Guaranteed payment to partners
- Net “active” rental income or loss
- Net “passive” rental income or loss
- Interest income
- Dividend income
- Capital gains and losses
- Chartiable contributions
- Section 179 “bonus depreciation
- Investment interest expense
- Partner’s health insurance premiums
- Retirement plan contributions (keogh plan)
- Tax Credit
How are partnership losses treated at the partner level?
A partner reports losses on the partner’s income tax return to the extent the partner has basis.
A partner’s loss in excess of the partners’s basis, and any loss not allowed on account of the “at-risk” rules or the “passive activity loss” rules, will be CF indefinitely (and remain suspended until basis bc available or the partner disposes of the entire PS interest)
When a PS is terminated, what basis does the partner assume for distribution property?
- Upon termination of a PS, a partner’s basis in the property distributed from the PS is equal to the partner’s basis in the PS interest reduced by any money received.
- The HP of the property includes the PS’s HP
How is an LLC treated for federal income tax purposes?
For federal income tax purposes, an LLC is treated as one of the following:
- PS
- Corporation
- Or sole proprietorship
What is the treatment of a single-member LLC for federal income tax purposes?
A single member LLC is considered a Disregarded Entity for Federal Income Tax purposes and will be treated as a sole proprietorship, unless it elects to be taxed as a corporation.
What consideration should be made before forming an LLC?
- An LLC provides similar protection from liabilities as a corporation but does not have the “double taxation” of a corporation if the LLC is taxed as a partnership.
- LLC members generally have the right to amend the LLC operating agreement, provide input, and manage LLCs, yet corporate SH generally do not have these same rights.
- An LLC cannot become a public company. It must convert to a corporation before issuing an IPO.
- LLC’s do not have these same restrictions with regard to its members as S corps have with regard to its shareholders.
What is the default tax treatment for an LLC that has 2 members and has not elected to be taxed as a corporation?
Partnership
