R5 - Pships

Question 1

What is the general rule for contributions of property to a partnership?

Answer 1

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

Question 2

Exceptions to no recognition of gain

Answer 2

capital interest acquired for services provided - taxable as ordinary income

property subject to an excess liability - liability assumed by other partners exceeds the contributing partners basis (this is gain to the partner)

Question 3

How do you calculate the partners initial basis in partnership interest (outside basis)?

Answer 3

Cash contributed
+ adjusted basis of property contributed
+ fmv of services provided (if capital int.)
- liabilities transferred to the pship, assumed by other partners
+ partners share of pship liabilities (existing that you will take on as a result of joining)

Question 4

Which debts allow the creditor to go after the partners personal assets?

Answer 4

Recourse debts

Question 5

If the FMV of the property contributed differs from the basis, the amount of unrealized gain or loss

Answer 5

is specially-allocated to the contributing partner upon the sale of that contributed property

Question 6

How do you calculate the gain from property with excess liability?

Answer 6

The gain is the amount it takes to restore the partners basis to zero

Question 7

The holding period of a partnership interest acquired in exchange for a contributed capital asset begins on the date

Answer 7

the partners holding period of the capital asset began

Note: for ordinary income property (inventory) the holding period begins on the date the property is contributed to the partnership

Question 8

What is outside basis

Answer 8

The basis a PARTNER has in the ownership interest in the partnership

Question 9

What is inside basis

Answer 9

The basis that the PARTNERSHIP itself has in the assets

Note: inside basis can come from contributions made by the partners. as a general rule the basis of an asset contributed by a partner would carryover and be the basis of the asset in the hands of the partnership. in addition inside basis can come from asset purchases the partnership makes with partnership funds

Question 10

Special allocation of built in gain or loss

Answer 10

specially allocated to the contributing partner when the property is sold.

Note: any post-contribution gains and losses are allocated among ALL partners in the partnership

Question 11

Basis in partnership Interest equals

Answer 11

capital account + partners share of pship liabilities

Question 12

A partnership terminates when

Answer 12

Operations cease
There are fewer than two partners (becomes a sole proprietorship)

Question 13

Adoption of Pship Tax Year

Answer 13

Calendar year is generally required (return due on March 15)

Fiscal Year consistent with tax year of majority partners

Question 14

If a fiscal year is elected, the referral period can be no longer than

Answer 14

3 months

example: elect Nov. 30th - deferral period is only 1 month to December 31st

Question 15

Related party losses for the pship

Answer 15

Losses between a controlling partner (over 50% interest in capital and profits) and his controlled partnership from the sale or exchange of property are not allowed.

Question 16

Related party gains for pship

Answer 16

Allowed and are taxable as ordinary income if the property is not a capital asset in the hands of the transferee

Question 17

Is a guaranteed payment included in the partner’s basis in the partnership interest?

Answer 17

No, it is deducted in calculating ordinary business income and is included in the taxable income of the partner

Question 18

Does the purchase of an asset affect basis?

Answer 18

No, it does not affect the partnerships income and has no effect on a partners basis

Note: life insurance premiums paid is a nondeductible expense but it does reduce a partners basis

Question 19

Guaranteed payments are payments to partners for

Answer 19

services or the use of capital without regard to partnership income. they are allowable tax deductions to the partnership and ordinary income to the partner receiving them

Note: guaranteed payments do not affect basis

Question 20

Are withdrawals and distributions a taxable event?

Answer 20

No but they will decrease a partners basis

Question 21

Allowable organizational expenditures

Answer 21

fees paid for legal services in drafting the partnership agreement
fees paid for accounting services
fees paid for partnership filings

Question 22

Allowable start up costs

Answer 22

Training costs
Advertising costs
Testing costs incurred prior to the opening of the business

Question 23

Loss limitation hurdles for partnerships

Answer 23

Tax basis limitation
At risk limitation
Passive activity loss limitation
Excess business loss limitation

Question 24

Partners Tax Basis in Partnership Interest

Answer 24

Beginning Capital Account
+% of all income
-% of all losses and deductions
-Distributions
=Ending Capital Account
+% partnership liabilities
=Ending Tax Basis in Pship Interest

Question 25

When would the partner in a partnership recognize a gain on distribution

Answer 25

When Cash > Basis, the excess is a gain

Note: when the NBV of a property distribution exceeds basis, the partner can take a lower basis in the property distributed to prevent the partnership basis from being reduced below zero

Question 26

Nonliquidating distributions from a partnership are generally

Answer 26

nontaxable both to the partnership and the partner

Question 27

A distribution from which entities are taxable

Answer 27

C Corp distribution to a shareholder is a taxable event

S Corp distribution is taxable if E&P exists from when it was a C Corp or if appreciated property is distributed

Question 28

LLCs can select to be taxes as

Answer 28

a partnership
corporation or
sole proprietorship

Question 29

A single member LLC is considered a

Answer 29

disregarded entity for federal income tax purposes and is treated as a sole proprietorship

Question 30

An LLC with more than one member is taxed as a

Answer 30

partnership

Question 31

At Risk Basis Calculation

Answer 31

Same as the partners tax basis in the partnership interest with the exception of certain nonrecourse debt

Note: Only qualified nonrecourse debt is included in at risk basis - real estate mortgage obtained from an unrelated commercial lender

Question 32

A loss suspended due to insufficient at risk basis when the partner disposes of the partnership interest can

Answer 32

be offset against any gain from selling the partnership interest

Question 33

A PAL suspended due to insufficient passive activity income when the partner disposes of the partnership interest can be

Answer 33

fully deducted against any income in the year you sell te pship interest

Question 34

The maximum net business loss that may be deducted is

Answer 34

270,000 (540,000 MFJ)
Any excess business loss is carried forward as an NOL and is subject to the 80% of taxable income limitation

Question 35

Three ways in which a partner may liquidate a partnership interest

Answer 35

complete withdrawal (liquidating distribution)
sale of a partnership interest
retirement or death

Question 36

In a liquidating distribution, a partners basis in the distributed property is the same as the

Answer 36

adjusted basis of his partnership interest reduced for any monies actually received

Note: the partner is simply exchanging his partnership interest for the distributed assets

Question 37

Sale of a partnership interest generally results in

Answer 37

a capital gain/loss

Question 38

How do you calculate the capital gain or loss on sale of pship interest

Answer 38

Beginning capital account
+/- share of income/loss
=Capital Account at sale of date
+Share of Pship Liabilities
=Adjusted Basis in Pship Interest
-Amount realized
=Capital gain or loss

Note: The relief from share of pship liabilities included in amount realized and the share of pship liabilities included in basis net to zero

Question 39

Exception to capital gain treatment on sale of pship interest

Answer 39

Any gain that represents a partners share of hot assets is treated as ordinary income. Hot assets are unrealized receivables and appreciated inventory

Question 40

In a liquidating distribution, basis in the partnership interest is allocated in what order

Answer 40

Cash
Hot Assets (Ordinary Income Property)
Other Property

Question 41

Payments made in liquidation of the interest of a retiring partner are considered

Answer 41

a distribution by the pship

Note: the retiring partner continues as a partner until his interest has been completely liquidated by partnership distributions

Question 42

Transfer of pship interest

Answer 42

743b basis adjustment equal to the difference between the value of the outside basis of the transferee partner (purchase price) and the partners share of partnerships inside basis of the assets