R5 Partnership Flashcards
Formation
no gain/loss at the formation
Contribution of property : NBV
Partnership Interest
Capital interest
Profit interest
Service provided to get interest
1) Capital Interest:
right to share in the net assets of partnership when liquidated
1.1) Capital Interest acquired for services provided
(taxable = FMV)
- taxed as ordinary income
2) profit interest
right to share in the future profit or loss of the partnership
………………..
2.1) Profit Interest Acquired for Services provided (FMV = 0 )
- not recognized any compensation as ordinary income
- coz the right is to get UNCERTAIN future profits
property subject to an (excess) liability
- excess is assumed by the other partners
- is gain to the partner - taxable
only a portion that is assumed by other partners is the gain, not the whole liability
( vs. in corp all liability would be gain)
Basis of partner in partnership
“Outside basis”
Cash contributed
+ property contributed ( adj. basis)
+ service provided (FMV, if capital interest)
- ( liabilities transferred to the partnership, assumed by other partners)
+ partners share of partnership liabilities ( existing liabilities that were in the partnership & new partner will take on)
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Partners initial basis in partnership interest
Debt allocation
Recourse
& Nonrecourse
1) recourse debt
- go after the partners’ personal property
- allocated to general partners only
2) nonrecourse debt
- limited to the secured property
- General and limited partner based on their relative profit-sharing ratio
Holding period
- Use old contributed property holding period ( PP&E)
capital asset or section 1231 assets - Exception
Inventory: holding period starts the date the property is contributed
Special Allocation: built-in gain
- if partner contributes property with an FMV that is higher or lower
- when sold
- built-in gain is allocated to the contributing partner
Inside Basis
Greater of
1) NBV OR
2) Debt assumed
Partner’s tax basis in the partnership interest
= Capital account (BASE) + partner’s share of partnership liabilities
B: Beginning Capital Account Cash FMV Services ( = taxable) NBV assets ( liability transferred to partnership) % assumed by others
A \+ % of all income ordinary business income separately stated income and gains tax-exempt income ( increases basis)
S ( UP to zeroing out partners basis) (- % all losses and deductions) -ordinary business loss -separately stated losses and deductions -nondeductible expenses
( Distributions) like a bank account, withdrawals = nontaxable = NBV
-Cash
-property: adjusted basis (NBV)
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E
ending capital account
+ % partnership liabilities ( recourse & non recourse)
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Ending TAX basis in the partnership interest
** tax basis can not be reduced below zero
##note: S corp: nonrecourse debt do not increase shareholders basis ( at-risk)
Partnership Tax Return
1065 - Due March 15th
- each partner is liable for only the taxes on his distributive share of partnership income, as reported on Schedule k-1, regardless of whether the distribution is actually made to the partner
Accounting period
termination of partnership
Calendar year
partnership terminated when:
- operation cease
- fewer than two partners
Related party gains loss
related party:
Over 50% interest
related party loss:
Disallowed
R of WRaP
……………………
related party gain
- is ordinary income
Reporting Partnership Income ( Schedule k-1)
- each partner gets one
- A partner must include on an individual income tax return the partner’s distributive share of ordinary business income or loss and each separately item of income, gain, loss, and deduction
- Each partner reports their share of net income/loss on schedule E
K is summary of k-1s
Biz Income
( Biz expenses)
( Guaranteed Payments) -> expenses to partnership
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1. ordinary biz income loss ( Sch E)
2. Guaranteed payments to partners ( to that partner as income)
3. net rental estate income/loss ( Sch E)
4. interest income ( Sch B)
5. Dividend Income ( Sch B)
6. Capital gains and losses (Sch D)
7. Net Section 1231 gain (loss) ( Sch D)
8. Charitable Contributions (Sch A)
9. Section 179 expense deduction - separately stated
10. Investment Interest expense
11. PArtners health insurance premiums ( included as part of guaranteed payments) Adju. to partners tax return
12. retirement plan contributions for employees
13. retirement plan contributions for partners ( included as part of guaranteed payments) Adju. to partners tax return
14. Tax credits (reported by the partnership but claimed by partners)
1) Guaranteed payment
2) Tax elections
3) Org expenditures & Start-up costs
4) Section 199A Qualified biz income
1) Guaranteed payment:
- Partnership Tax deduction
- Partner Taxable Income as ordinary income
- not included in QBI
1.1 Retirement Payments
payments to retiring partner that is not in liquidation of partnership
- ordinary income to the recipient
- deduction to partnership
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2) Tax elections
- partnership decides ( not the partner)
- tax year: Dec 31st
3) Org expenditures (a) & Start-up costs (b)
5k is phased out after cost exceeds 50k
(a) = 5k/excess 180 months
legal services, accounting services
(b) = 5k/ excess 180 months
training, adv, testing
## syndication cost = not deductible raising capital (e.g. offering materials)
4) Section 199A Qualified biz income
20% deduction
Loss limitation
1) tax basis limitation partner level issue
2) at-risk limitation partner level issue
3) passive activity loss (PAL) limitation = real estate losses
4) excess business loss limitation = NOL
1) Tax Basis Limitation
- a loss in excess of the partner’s tax basis is suspended
until basis reinstated in future
- share of debt depend on partner and type of debt
- when sold, if insufficient tax basis - loss lost forever
2) at-risk limitation
- recourse debt only for general partners
- exception of certain nonrecourse debt
- qualified nonrecourse debt is included in at-risk basis , others are not
- loss allowed when sold,
3) Passive Activity Loss (PAL) Limitation
- Rental real estate
- only offset passive activity income
- suspended and carried forward
- Fully deduct in year you sell it ( against any income)
4) Excess Business Loss Limitation
- max biz loss that can be deducted in
$524000 (MFJ)
$262,000 (others) accr to 2021
- CF NOL, is subject to 80% taxable income
Nonliquidating Distributions: Like a bank account withdrawal
- nontaxable
- reduce the partners basis
- by cash or adjusted basis (NBV) of property
- Property Distribution
- maybe reduced if the partner does not have a sufficient basis
- stop at zero
1.1 Basis in partnership interest greater than the adjusted basis of property distributed:
USE NBV to reduce basis
- 2 Basis in partnership interest less than the adjusted basis of property distributed:
- stop at zero
- no gain
- ———————————————- - Cash distribution
- if greater than basis: excess = capital gain
- Multiple Assets
- when partners basis less than the adjusted basis of the asset
:basis assigned first to Cash then hot assets ( inventory and unrealized receivables) Then to other properties
LLC vs. limited partnership
LLC: Corporation, but for tax purpose if 2 or more owners - partnership if 1 owner: sole proprietorship if wants to be treated as corp for tax too ( needs to elect)
- all are limited member
VS.
limited partnership
- needs one general partner
Liquidation of partnership
1) complete withdrawal
2) sale of partnership
3) retirement or death
1) complete withdrawal (liquidating distribution)
- Nontaxable liquidation #Rule: zero out to get out
adj basis
(cash distribution)
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remaining basis to be allocated to assets distributed
1.1 Gain recognition = exception
Cash > Basis
1.2 loss recognition = expectation
Only cash < Basis
No other items received
1.3 distribution of multiple assets
cash then hot assets then other assets
1.4 Distribution of hot assets only
LOSS if: partners basis > than partnerships basis in assets
A) IF partners basis < “less” than partnerships basis in assets
B) IF partners basis > “more” than partnerships basis in assets
A) IF partners basis < than partnerships basis in assets
- assign a basis
- adjust the basis of any assets that have depreciated in value
- allocate any basis based on a relative adjusted basis
* *See R5 M4 page 3 for example**
…………………………………………
B) IF partners basis > “more” than partnerships basis in assets
- assign a basis
- adjust the basis of any assets that have appriciated in value
- allocate any basis based on an FMV
* *See R5 M4 page 3 for example**
Liquidation of partnership
2) sale of partnership
1) complete withdrawal
2) sale of partnership
3) retirement or death
2) sale of partnership
GR: Capital gain or loss
Beg capital account
share of income(loss) up to sale
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capital account at sale date
Share of partnership liabilities
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adjusted basis in partnership interest
( amount realized)
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Capital gain/loss
Cash received
+ FMV of property received
+ relied from share of partnership liabilities
Exception:
Ordinary income -if hot assets
(inventory and unrealized receivables)
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2.1 Allocation of partnership income or loss
- allocated pro rata
- based on the number of days
Liquidation of partnership
3) retirement or death
1) complete withdrawal
2) sale of partnership
3) retirement or death
- Capital gain or loss
- if measured by partnership income - ordinary income
Section 754 election and section 743(b) basis adjustment
when sold or exchange or upon death of a partner
if outside basis is not equal to inside basis then make election to adjust
so that inside and outside basis will be equal
see R5 m4 page 7 for example
