R5 - Pships Flashcards
What is the general rule for contributions of property to a partnership?
No gain or loss is recognized on a contribution of property to a partnership in return for a partnership interest
Exceptions to no recognition of gain
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)
How do you calculate the partners initial basis in partnership interest (outside basis)?
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)
Which debts allow the creditor to go after the partners personal assets?
Recourse debts
If the FMV of the property contributed differs from the basis, the amount of unrealized gain or loss
is specially-allocated to the contributing partner upon the sale of that contributed property
How do you calculate the gain from property with excess liability?
The gain is the amount it takes to restore the partners basis to zero
The holding period of a partnership interest acquired in exchange for a contributed capital asset begins on the date
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
What is outside basis
The basis a PARTNER has in the ownership interest in the partnership
What is inside basis
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
Special allocation of built in gain or loss
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
Basis in partnership Interest equals
capital account + partners share of pship liabilities
A partnership terminates when
Operations cease
There are fewer than two partners (becomes a sole proprietorship)
Adoption of Pship Tax Year
Calendar year is generally required (return due on March 15)
Fiscal Year consistent with tax year of majority partners
If a fiscal year is elected, the referral period can be no longer than
3 months
example: elect Nov. 30th - deferral period is only 1 month to December 31st
Related party losses for the pship
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.
Related party gains for pship
Allowed and are taxable as ordinary income if the property is not a capital asset in the hands of the transferee
Is a guaranteed payment included in the partner’s basis in the partnership interest?
No, it is deducted in calculating ordinary business income and is included in the taxable income of the partner
Does the purchase of an asset affect basis?
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
Guaranteed payments are payments to partners for
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
Are withdrawals and distributions a taxable event?
No but they will decrease a partners basis
Allowable organizational expenditures
fees paid for legal services in drafting the partnership agreement
fees paid for accounting services
fees paid for partnership filings
Allowable start up costs
Training costs
Advertising costs
Testing costs incurred prior to the opening of the business
Loss limitation hurdles for partnerships
Tax basis limitation
At risk limitation
Passive activity loss limitation
Excess business loss limitation
Partners Tax Basis in Partnership Interest
Beginning Capital Account
+% of all income
-% of all losses and deductions
-Distributions
=Ending Capital Account
+% partnership liabilities
=Ending Tax Basis in Pship Interest
When would the partner in a partnership recognize a gain on distribution
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
Nonliquidating distributions from a partnership are generally
nontaxable both to the partnership and the partner
A distribution from which entities are taxable
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
LLCs can select to be taxes as
a partnership
corporation or
sole proprietorship
A single member LLC is considered a
disregarded entity for federal income tax purposes and is treated as a sole proprietorship
An LLC with more than one member is taxed as a
partnership
At Risk Basis Calculation
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
A loss suspended due to insufficient at risk basis when the partner disposes of the partnership interest can
be offset against any gain from selling the partnership interest
A PAL suspended due to insufficient passive activity income when the partner disposes of the partnership interest can be
fully deducted against any income in the year you sell te pship interest
The maximum net business loss that may be deducted is
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
Three ways in which a partner may liquidate a partnership interest
complete withdrawal (liquidating distribution)
sale of a partnership interest
retirement or death
In a liquidating distribution, a partners basis in the distributed property is the same as the
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
Sale of a partnership interest generally results in
a capital gain/loss
How do you calculate the capital gain or loss on sale of pship interest
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
Exception to capital gain treatment on sale of pship interest
Any gain that represents a partners share of hot assets is treated as ordinary income. Hot assets are unrealized receivables and appreciated inventory
In a liquidating distribution, basis in the partnership interest is allocated in what order
Cash
Hot Assets (Ordinary Income Property)
Other Property
Payments made in liquidation of the interest of a retiring partner are considered
a distribution by the pship
Note: the retiring partner continues as a partner until his interest has been completely liquidated by partnership distributions
Transfer of pship interest
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
