R4.2 – Partnership Taxation

Question 1

Forms

Answer 1

Form 1065 – Partnership Tax Return

Schedule K – Partners’ Distributive Share Items (Page 4 of Form 1065)

Schedule K-1 – Partners’ Shares of Income, Deductions, Credits, etc.

Schedule L – Balance Sheets per Books

Form 8832 – Entity Classification Election

Question 2

Partnership

Answer 2

Partnership is not a taxable entity

Income and expenses are divided by partners, and each partner reports his share on his individual tax return.

Income flows through and is taxed to owners regardless of distributions

Two types of partners:

1. General
2. Limited

All partnerships must have at least one general partner

Question 3

General Partners

Answer 3

Participate in management

Have joint and several liability for partnership’s debts

Question 4

Limited Partners

Answer 4

No participation in management

Liable only up to their individual investment

Question 5

Formation & Basis – Partner

Answer 5

No gain or loss is recognized on a contribution of property in return for a partnership interest

Exception:
– Partnership interest acquired for services rendered
– Property is subject to excess liability:

Partnership interest acquired for services rendered
– value of partnership = ordinary income to partner

Property is subject to excess liability:
– Excess liability = liability assumed by other partners exceeds adjusted basis of property
– Excess liability recognized as taxable gain to partner
– Partner’s basis = 0

Question 6

Formation & Basis – Partner: Initial Basis

Answer 6

Initial Basis in Partnership Interest
= Cash contributed
+ Property contributed, adjusted basis
– % of incoming partner’s liabilities assumed by the other partners
+ $ of other partners’ liabilities assumed by incoming partner
+ Services (FMV and taxable to partner)

Question 7

Formation & Basis – Partner: Holding Period

Answer 7

Capital asset/section 1231 asset contributed = partner’s interest in partnership includes holding period of asset in hands of partner prior to contribution date.

Other assets = holding period of partner’s interest in partnership begins on contribution date

Question 8

Formation & Basis – Partnership

Answer 8

The partnership’s basis in the contributed property is the contributor’s basis

Holding period
– Capital asset/section 1231 asset contributed = includes time asset held by partner prior to contribution date.
–Other assets = begins on contribution date

Question 9

Partner’s Basis Formula

Answer 9

Beginning capital account
+ % all income (including tax-free)
– all losses (including non-deductible expenses)
– withdrawals (property distribution reduced by NBV)
= Ending capital account
+ % of recourse liabilities
= Year-end basis

Question 10

Partner’s Basis vs. Capital Account

Answer 10

Basis = Capital account + Partner’s share of liabilities

Question 11

Partnership Tax Returns

Answer 11

Must file Form 1065 (an information return)

No tax is paid on this return – Income is shown on this return and it “flows through” to the individual tax returns of the partners via a Schedule K-1

Question 12

Partnership Tax Returns – Accounting Period

Answer 12

Partnerships use the same year and as it to majority interest partner(s)

Partnership tax returns due on the 15th day of the 4th month after year end (April 15th for calendar year)

Partnerships may use a fiscal year-end if there is a business purpose or a natural business year.

If partnerships choose anything other than calendar year a maximums three-month deferral is permitted
– Earliest fiscal year-end a partnership can have is September 30th

Question 13

Partnership Tax Returns – Transactions between Partner and Partnership

Answer 13

Generally, if a partner enters into a transaction with his partnership, the transaction is deemed to have occurred between the partnership and an outsider

Exception: Partner is a controlling partner (50%+ interest in partnership)
– Losses are related party losses and can’t be deducted
– Gains are ordinary income if
–the property is depreciable in the hands of the transferee (purchaser)
–the property is not a capital asset in the hands of the transferee

Question 14

Partnership Tax Returns – Partner’s share of income, credits, and deductions

Answer 14

Partner must include her/his/its distributive share of partnership income (even if not received) on his own income tax return

Partner’s tax loss deductions limited by
– Partner’s basis in the partnership, and
– The “at-risk” provisions
– Passive loss limitations

Guaranteed payments are compensation paid to partners for services or use of capital.
– Income to receiving partner
–Deductible to the partnership

Question 15

Partnership Tax Returns – Separately reported Items

Answer 15

Net business profit or loss

Guaranteed payment to partners

Net active rental real estate income all loss

Net passive rental real estate income loss

Interest income

Dividend income

Capital gains and losses

Charitable contributions

Section 179 (expensive election)

Investment interest expense

Partners’ health insurance premium*

Retirement plan contributions (Keogh plan)

Tax Credits

Question 16

Partnership Tax Returns – Net business profit or loss

Answer 16

Net Business Income or Loss
= Business Income
– Business expenses
– Guaranteed payments

Question 17

Nonliquidating Distributions

Answer 17

No gain recognized unless cash distributed exceeds the partner’s basis in the partnership

Partner’s basis in the partnership is reduced by the cash or NBV or the property received.

The partner’s basis in the property received will be the same as the basis in the hands of the partnership immediately prior to the distribution.

Loss not recognized

Question 18

Liquidating Distributions

Answer 18

Three ways a partner may terminate his interest

1. Complete withdrawal
2. Sale of partnership interest
3. Retirement (Death)

Question 19

Liquidating Distributions – Complete Withdrawal

Answer 19

Partner’s basis for the distributed property is the same as the adjusted basis of the partner’s partnership interest reduced by any cash received.

Gain is recognized only if the cash received exceeds the partner’s basis in the partnership

Question 20

Liquidating Distributions – Sale of partnership interest

Answer 20

Partner has a capital gain or loss when transferring a partnership interest

The gain or loss is measured by the difference between the amount realized for the sale and the adjusted basis of the partnership interest

If partnership liabilities are transferred to the buyer, they are considered part of the amount realized

Question 21

Liquidating Distributions – Retirement (Death)

Answer 21

Payments are made for both the partner’s interest in the partnership (capital gain or loss) assets and the partner’s share of partnership income (ordinary income).