R4.2 – Partnership Taxation Flashcards
Forms
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
Partnership
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:
- General
- Limited
All partnerships must have at least one general partner
General Partners
Participate in management
Have joint and several liability for partnership’s debts
Limited Partners
No participation in management
Liable only up to their individual investment
Formation & Basis – Partner
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
Formation & Basis – Partner: Initial Basis
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)
Formation & Basis – Partner: Holding Period
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
Formation & Basis – Partnership
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
Partner’s Basis Formula
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
Partner’s Basis vs. Capital Account
Basis = Capital account + Partner’s share of liabilities
Partnership Tax Returns
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
Partnership Tax Returns – Accounting Period
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
Partnership Tax Returns – Transactions between Partner and Partnership
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
Partnership Tax Returns – Partner’s share of income, credits, and deductions
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
Partnership Tax Returns – Separately reported Items
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
Partnership Tax Returns – Net business profit or loss
Net Business Income or Loss
= Business Income
– Business expenses
– Guaranteed payments
Nonliquidating Distributions
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
Liquidating Distributions
Three ways a partner may terminate his interest
- Complete withdrawal
- Sale of partnership interest
- Retirement (Death)
Liquidating Distributions – Complete Withdrawal
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
Liquidating Distributions – Sale of partnership interest
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
Liquidating Distributions – Retirement (Death)
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).
