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1
Q

Individual Taxation

What is the difference between and tax deduction and a tax credit?

A
  • A tax credit will decrease the amount of tax owed dollar for dollar, which will offer more tax savings
  • A tax deduction will reduce the overall taxable income
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2
Q

Individual Taxation

What is types of income are excluded from gross income?

A
  • Gifts given by bequest (i.e. wills)
  • Life Insurance Settlements
  • Proceeds from a lawsuit for physical injuries
  • Scholarships
  • Fellowship Grants only up to the of costs for tuition, books and other education expenses
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3
Q

Individual Taxation

How is taxable income calculated for a cash-basis taxpayer when compensation includes a service or product?

A
  • If services are paid for with property, then income is the FMV of the property on the date it was received
  • If cash and services are received, then the income would be the total amount received + the FMV of the property on the date it was received
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4
Q

Individual Taxation

When are advanced payments reported as income in the current year?

A
  • When there are no restrictions on the advanced amount
  • When there is a 1-year deferral of income for services performed in subsequent years
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5
Q

What is Subpart F Income?

A
  • Subpart F income is income that comes from foreign company services that is performed outside of the foreign subsidiary’s country of incorporation
  • Example: A U.S. company has a subsidiary in England, and the English subsisidiary performs services in Ireland that were agreed to by the U.S. parent corporation
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6
Q

Individual Taxation

How is an annuity payment included in gross income?

A
  • Any amount received that is in excess of the cost of the annuity are included in gross income

Example
Annuity Investment: $100,000
Disbursements: $12,000/year for 10 years

Total Amount of Disbursements: $12,000 x 10 = $120,000
Total Excess Amount: $120,000 - $100,000 = $20,000
Current year income reported in gross income: Total Excess Amount/# of Years = $20,000/10 = $2,000

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7
Q

Individual Taxation

When can an employee taxpayer take deductions on state and local taxes paid?

A
  • State and local taxes paid are deductible when the taxpayer selects itemized deductions
  • Federal income tax withheld is taken as a tax credit, since the tax credit applies to the total tax due

Federal, Social Security and State and local taxes are not included in the standard deductions

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8
Q

Individual Taxation

What is applied for self-employment tax?

A
  • Social Security
  • Medicare

Passive and portfolio income are not included in self-employment tax

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9
Q

Individual Taxation

What schedule is used to report additional income and adjustments to income?

A

Schedule 1
* Part I of Schedule 1 reports income
* Part II of Schedule 1 reports adjustments to income

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10
Q

Individual Taxation

What is reported on Schedule 1 on Form 1040?

A
  • Additional income and adjustments
  • Summaries from Schedule E and Schedule C
  • Hobby income
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11
Q

Individual Taxation

What is reported on Schedule B of the Form 1040?

A

Portfolio Income
* Interest Income
* Dividend Income

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12
Q

Individual Taxation

What is reported on Schedule E of the Form 1040?

A

Supplemental Income and Loss
* Rental income and deductions
* Self-Employment Tax
* Foreign Property Tax

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13
Q

Individual Taxation

What is reported on Schedule C of the Form 1040?

A

Information for Self-Employeed Business Owners and sole proprietorships
* Revenue/Losses
* Expenses
* Meal and dining expenses
* Profit or loss from business
* Foreign Real Property Taxes
* Unincorporated business tax
* Payroll Taxes

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14
Q

Individual Taxation

What is reported on Schedule D of the Form 1040?

A

Capital Gains and Losses
Part I: Short-term capital gains
Part II: Long-Term capital gains

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15
Q

Individual Taxation

What is reported on Schedule SE of the Form 1040?

A

Self-Employment tax due on net earnings

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16
Q

Individual Taxation

What is the formula to calculate savings bond interest?

A

Tax-Exempt Interest
* (Higher Education Expense / Total Bond Amount Received) x Accrued Interest

Taxable Interest
* ((Total Amount Received - Tax-Exempt Interest) / Total Bond Received) x Accrued Interest

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17
Q

Individual Taxation

What is the income treshold for Tax-Exempt Series EE Savings Bond interest?

A

Single: $80,000
Married, Filing Jointly: $120,000

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18
Q

Individual Taxation

What is the revenue threshold to report passive Loss

A

A phased-out approach is used:
* AGI less than $100,000, then the maximum amount of $25,000 can be deducted

If AGI is more than $100,000 and less than $150,000:
* The maximum deduction of $25,000 is phased out
* $0.50 on the dollar will be calculated

If AGI is equal and more than $150,000
* The passive loss is only offset by the passive income
* The passive loss is carried over

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19
Q

Individual Taxation

What is an example of a phased out passive loss deduction when the taxpayer actively participates?

A

AGI = $110,000, Real estate loss = $30,000
The Phase Out Range = $150,000 - $125,000
$0.50 x (110,000 - 100,000) = $0.50 x $10,000 = $5,000
$25,000 - $5,000 = $20,000 deduction against earned income

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20
Q

Individual Taxation

What happens when a passive gain and a passive loss occur in the same year?

A
  • All passive activity gains and losses are netted to arrive at a single number
  • If the net number is a gain, the gain is taxable
  • If the net number is a loss, the loss cannot be deducted against salary and the loss is carryfoward indefinitely
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21
Q

Individual Taxation

What is the difference between Capital Assets and Section 1231 Assets?

A
  • Capital Assets are for individual taxpayers
  • Section 1231 assets are for real estate and other assets used in a trade or business
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22
Q

Individual Taxation

What is the limit for deducting capital gains and losses?

A

$3,000 (Single, MFJ, HH)
$1,500 (Married-Filing Separately)

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23
Q

Individual Taxation

How are gains and losses for capital reported?

A
  • Stocks and Bonds: Gains and losses are reported
  • Capital loss on investment stock has a limitation of $3,000
  • Home and furnishings: Only gains are reported, not losses
  • Recreation: Only gains are reported, not losses
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24
Q

Individual Taxation

What is the income tax rate on capital gains and losses?

A
  • The tax rate is 0% if the taxpayer is already in the lower tax bracket
  • The maximum tax is 15%
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25
Q

Individual Taxation

What is the limit for Qualified Business Income (QBI)?

A

Taxable income of $165,000 (Single)/$330,000 (MFJ)

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26
Q

Individual Taxation

What is the calculation for QBI Deduction?

A

Taxable income x Lesser of:
* 20% x the lower of taxable income or Schedule C Profit
* 50% of W-2 wages earned from the partnership

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27
Q

Individual Taxation

How is provisional income calculated when determining taxes on Social Security benefits?

A

AGI (Before Benefits) + Total Other Income + Total Interest + 50% of Social Security Benefits

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28
Q

Individual Taxation

What are the income thresholds to determine taxable income on social security benefits?

A

Taxable Income
* Less than or equal to $25,000 (Single)/$32,000 (MFJ): No Tax
* More than $25,000/$32,000 but less than $34,000/$44,000: 50% Tax
* More than $34,000/$44,000: 85% Tax

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29
Q

Individual Taxation

How are social security benefits calculated when determining taxable income with respect to provisional income being at the 50% tax threshold?

A

Married, Filing Jointly:
Income is between $32,000 and $44,000

Lesser of:
* 50% of Social Security Benefits
* 50% of the excess of provisional income over $32,000

Single, Head of Household or Qualifiying Widower:
Income is between $25,000 and $34,000

Lesser of:
* 50% of Social Security Benefits
* 50% of the excess of provisional income over $25,000

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30
Q

Individual Taxation

How are social security benefits calculated when determining taxable income with respect to provisional income being at the 85% tax threshold?

A

Single, Head of Household, Qualifying Widow

Lesser of:
* 85% of the excess of provisional income over $34,000 + $4,500
* 85% of benefits

Married, Filing Jointly

Lesser if:
* 85% of the excess of provisional income over $44,000 + $6,000
* 85% of benefits

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31
Q

Individual Taxation

What is considered as taxable interest income that could cause social security to be taxable?

A
  • Tax exempt bonds
  • Banks certificates of deposit
  • US Savings Bonds
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32
Q

Individual Taxation

What are the deductions to arrive at AGI?

A

“SHAMPOO”
* Student Cost, including student loan interest
* Health Insurance paid by Self-Employed, HSA
* Alimony paid before 12/31/18 divorces
* Moving expenses for members of military
* Penalty on early withdrawal of savings
* One-half of self-employment tax
* Old age/Retirement IRA contributions

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33
Q

Individual Taxation

What is the maximum credit that can be taken on student loan interest?

A
  • The limit is $2,500
  • Deduction starts to phase out when AGI is $70,000 (Single)/$140,000 (MFJ)
  • The phase-out range is $15,000
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34
Q

Individual Taxation

What is the maximum deduction for Health Savings Accounts (HSA)?

A
  • Maximum deduction is $3,600 (Single) /$7,200 (MFJ)
  • Must have a deductible of $1,400 (Single) /$2,800 (MFJ)
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35
Q

Individual Taxation

What is the deduction limit for a self-employed pension, or KEOGH, plan?

A

Lesser of
* 25% of net income reported on Scheldule C
* Maximum amount of about $66,000

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36
Q

Individual Taxation

What is the calculation to determine the deduction from a self-employed pension, or KEOGH, plan?

A

20% X (Self-Employed Earnings - Self Employment Taxes)

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37
Q

Individual Taxation

What is the maximum deductions for IRA Contributions?

A

Applies to both Traditional and Roth IRAs
* Before Age 50: $6,500/$13,000
* After Age 50: $7,500/$15,000
* If the earned income is less than the maximum deduction, then the deduction contribution would be the earned income.

Example
* Earned income for a 50 year old is $5,200, then the IRA deduction contribution reported would be $5,200.

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38
Q

Individual Taxation

What is the spousal rule for IRA contribution deductions?

A
  • The AGI is below $220,000
  • A married spouse who is non-working , or earns very little, is entitled to contribute and deduct the same amount that the working spouse contributed
39
Q

Individual Taxation

How is the taxation treated for an Education IRA?

A
  • The Eduction IRA tax is similar as to a Roth IRA
  • No deduction for contribution
  • No taxation when distributed
40
Q

Individual Taxation

What amount can be contributed to an Education IRA?

A
  • Maximum Education IRA contribution is $2,000/year
  • A distribution of $10,000 is allowed for private K-12 education
41
Q

Individual Taxation

What is the difference between the Child Tax Credit and the Family Credit?

A

Child Tax Credit
* The tax credit is $2,000 per child under the age of 17, as of 12/31 of the taxable year
* $1,600 per child is partially refundable

Family Credit
* $500 non-refundable credit for each qualifying dependent, other than qualifying children
* Example of qualifying dependent is a child over the age of 17 or an older or elderly parent

42
Q

Individual Taxation

What is the dependent care credit?

A
  • No AGI limitation
  • Covers 20% of care expenses
  • If AGI is less or equal to $15,000, the percentage covered is 35%
  • Expenses are capped at $3,000 for one child, $6,000 for more than one child
  • The calculation is limited to the lowest earned income of the spouse or the expense cap
  • If the spouse has no income, then no credit can be taken
43
Q

Individual Taxation

How is the dependent care credit calculated?

A

Examples

  • For two children, one spouse earned $60,000 and the other spouse earned $10,000. Total child care costs of $15,000. Since $6,000 is less the lowest income earned, then the dependent care credit would be $1,200 ($6,000 x 20%)
  • For two children, one spouse earned $73,000 and the other spouse earned $2,000. Since $2,000 is less then the maximum amount of $6,000, the dependent care credit would be $400 ($2,000 x 20%)
44
Q

Individual Taxation

What are the requirements for the American Opportunity Credit?

A
  • Taxpayer must be enrolled as a student for at least a half-time basis
  • The taxpayer must be a candidate for a degree
  • Qualifying expenses must be for the current year and for the first three months of the following year
  • Qualifying expenses are for tuition and all related supplies required for courses, except room and board
  • Credit limitation of $2,500 per student
  • Up to 40% of $1,000 of tax liablity is partially refundable
  • AGI phase out begins at $80,000/$160,000
  • No credit after $90,000/$180,000
45
Q

Individual Taxation

What is the calculation to determine the American Opportunity Credit Deduction?

A
  • The spend amount to maximize the credit is $4,000
  • 100% of the first $2,000 of qualifying expenses
  • 25% of the following $2,000 of qualifying expenses
46
Q

Individual Taxation

What is an example of American Opportunity Credit calculation?

A

Total tax before credit is $2,000
American Opportunity Credit = $2,500
Tax Liability = ($500) ($2,000 - $2,500)
Amount refunded would be $500 x 40% = $200

Total tax before credit is $2,500
American Opportunity Credit = $2,500
Tax Liability is zero since $2,500 - 2,500 = 0
Amount refunded would be $1,000 x 40% = $400

Total tax before credit is $800
American Opportunity Credit = $2,500
Tax Liability = ($1,700) ($800 - $2,500)
Amount refunded would be $1,700 x 40% = $680

47
Q

Individual Taxation

What are the requirements for the Lifetime Learning Credit?

A
  • Phase out of AGI starting at $80,000/$160,000
  • No credit at all at $90,000/$180,000
  • Credit is non-refundable
  • Can be taken for courses in graduate, undergraduate or for learning a new job skill
48
Q

Individual Taxation

What is the calculation to determine the Lifetime Learning Credit Deduction?

A
  • 20% of the amount spent on the first $10,000 of tuition and expenses per year
  • Maximum credit is $2,000 per family per year
49
Q

Individual Taxation

What are due diligence requirements?

A
  • Due diligence is required by third-party preparers
  • It is a questionnaire that they must complete to make sure that the information is reported correctly
50
Q

Individual Taxation

When must a paid preparer answer due diligence questions?

A

Whenever a child is involved
* American Opportunity Credit
* Earned Income Credit
* Child Tax Credits
* Head of Household Status

51
Q

Individual Taxation

What are the requirements for the Retirement Savings Contribution Credit?

A
  • Maximum of $1,000 non-refundable credit based on IRA contributions
  • The credit is non-refundable
  • The credit is available to younger people starting in the workforce
  • AGI limitation of $37,000/$74,000
  • If the AGI is less than $37,000, the credit is 50% of the contribution
52
Q

Individual Taxation

What is the calculation to determine Retirement Savings Contribution Credit?

A
  • IRA Contribution x 50%
  • Credit cannot be greater than $1,000
53
Q

Individual Taxation

What are the requirements for the Elderly and/or Permanently Disabled credit?

A
  • Credit is either lesser of prior tax credit or 15% of eligible income
  • The credit is non-refundable
  • AGI limits and social security count against the credit
  • The base amount is $3,750 (Single) / $7,500 (MFJ)
  • Must be age 65 or disabled to qualify
54
Q

Individual Taxation

What is the calculation to determine the credit for Elderly and/or Permanently Disabled?

A

Base Amount
(Social Security Benefits)
(50% of AGI of $10,000)
Balance

Credit is lesser of current tax liability or 15% of balance

55
Q

Individual Taxation

What is an example of the credit for the Elderly Care Credit?

A

AGI: $16,000 (MFJ)
Taxes Owed: $95
Social Security: $2,000

Base: $7,500
Social Security Benefits: (2,000)
50% of AGI Over $10,000: (3,000)
Total: $2,500
Balance = 15% x $2,500 = 375
Credit: Lesser of Current Tax Liability or Balance

56
Q

Individual Taxation

What is the calculation to determine business tax credit?

A
  • Step 1: Calculate the Net Tax Liability = Company’s Tax Liabilitity - $25,000
  • Step 2: Calculate the current year’s business credit = Company’s Tax Liability - (Net Tax Liability x 25%)
  • Step 3: Determine Carryforward = Company’s current liability - Current Year’s Business Credit
57
Q

Individual Taxation

What credits are applicable to the business tax credit?

A

“WERF’S FIELD”
* Work Opportunity Credit
* Empowerment Zone Employment Credit
* Rehabilitation Credit
* Family and Medical Leave Credit
* Small Employer Health Insurance Credit
* Foreign Tax Credit
* Incremental Research Credit
* Employer Provided Child Care Credit
* Low-Income Housing Credit
* Disabled Access Credit

58
Q

Individual Taxation

What are the qualifications for the Credit for Family and Medical Leave?

A
  • Employees must receive at least two weeks of annual paid leave
  • If the employer pays 50% of the wages during the employee’s leave, the credit is 12.5%
  • If the employer pays 100% of the wagest during the employee’s leave, the credit is 25%
59
Q

Individual Taxation

What is the Work Opportunity Credit?

A
  • Companies get credit for hiring from a certain target group
  • The credit reduces the wages paid deduction
  • The credit is based on the employee’s first-year wages
  • The maximum credit is 40% of the first $6,000 wages paid
60
Q

Individual Taxation

What is the Foreign Tax Credit Calculation?

A

(Foreign Source Income / Worldwide Income) x US Tax on Worldwide Income

61
Q

Individual Taxation

How are medical and dental expenses covered as a deductible?

A

The expenses must exceed 7.5% of AGI

Example
Health Insurance Premiums = $12,000
Prescription Medicines = $3,000
Reimbursed Insurance Payments = ($1,000)
Total Medical Expenses = $14,000

Total AGI = $100,000
7.5% x $100,000 = $7,500
Medical Expenses - 7.5% of AGI = Deduction
$14,000 - $7,500 = $6,500

62
Q

Individual Taxation

What is the maximum deductible for State and Local Property Tax?

A

This is sometimes known as the SALT deduction

  • $10,000 for Single, Head of Household, Married, Filing Jointly
  • $5,000 for Married, Filing Separately
63
Q

Individual Taxation

What is the maximum deductible for Interest Expense?

A
  • $750,000 for Single, Head of Household, Married, Filing Jointly
  • $325,000 for Married, Filing Separately
64
Q

Individual Taxation

How are non-cash charitable contributions valued?

A
  • The lower of the tax basis or the fair market value at the date of the donation
  • If the asset was held for less than 1 year, the value is the based on the basis of the asset
  • If the asset is donated for the same genre (i.e. artwork for a museum, then the value is the FMV is used
65
Q

Individual Taxation

What is the limitation for charitable contributions?

A
  • Cash: 60% of the AGI
  • Long-Term Capital Gain: 30% of AGI
66
Q

Individual Taxation

When can casualty losses be deducted?

A
  • When the loss is declared a disaster by the president
  • Each loss is the lesser of the adjusted FMV or the tax basis of the property
  • Each loss must be reduced by the insurance reimbursement and $100
  • The deduction is the amount of the total loss in excess of 10% AGI
67
Q

Individual Taxation

What is an example of a casualty loss deduction?

A

AGI = $70,000
Less of Adjusted Basis or FMV = $130,000
Reimbursement = $120,000
Total Loss = ($130,000 - 120,000) - $100 = $9,900
10% of AGI = $70,000 x 10% = $7,000
Deductible = $9,900 - $7,000 = $2,900

68
Q

Individual Taxation

What type of life insurance that is paid by the employer is not taxable to the employee?

A
  • Group term life insurance
  • The limitation of coverage is $50,000
  • Anything over $150,000 is taxable to the employee based in IRS Cost

Example
Salary = $80,000
Group-Term Life Insurance = $120,000
IRS Cost: $2.12/$1,000 of coverage
First $50,000 is excluded, taxable amount = $70,000 ($120,000 - $50,000)
$2.12 x ($70,000/1,000) = $148.40
Taxable Amount = Salary + $148.40 = $80,000 + $148.40 = $80,148.40

69
Q

Individual Taxation

What is dependent care assistance?

A
  • Dependent care assistance is part of the employer’s cafeteria plan
  • Programs are availabe to the employee
  • If the employee chooses this plan, they can exclude up to $5,000
70
Q

Individual Taxation

How are higher education costs treated as part of an employer’s cafeteria plan?

A
  • Payments are made by the employer on behalf of the student
  • A maximum of $5,250 is excluded from the employee’s gross income
71
Q

Individual Taxation

What are the limits for employee achievement awards?

A
  • If the award plan is in place, the deductible is $1,600 per employee
  • If the award plan is not in place, the deductible is $400 per employee
72
Q

Individual Taxation

What type of income is included when calculating Kiddie Tax?

A
  • Unearned Income
  • Dividend Income
73
Q

Individual Taxation

What is the undearned income thresholds for Kiddie Tax?

A
  • The first $1,250 of unearned income is exempt from kiddie tax
  • The next $1,250 is taxed at the child’s rate
  • The first $2,500 of unearned income is exempt from kiddie tax
  • The difference between unearned income and $2,500 is subject to kiddie tax
74
Q

Individual Taxation

What if the child has earned income as well as unearned income?

A

The standard deduction is limited to the greater of
* $1,250
* Wages plus $400

75
Q

Individual Taxation

How are business casualty losses reported?

A
  • Business casualty losses are reported on Form 4684
  • The loss is the lesser of the property’s basis vs. the decline in FMV
  • If the property is completly destroyed or stolen, the adjusted basis is used to compute the loss (the FMV is completely disregarded)
  • If inventory is stolen, the loss is the adjusted basis
76
Q

Individual Taxation

What is the best tax planning strategy when an individual’s tax bracket changes?

A
  • When the income tax bracket lowers, the best strategy is to defer income until the following year
  • If the income tax bracket increases, the best strategy is to defer deductions since the deduction will have a higher tax value in the current year
77
Q

Individual Taxation

What are the steps to calculate business income loss

A
  • Step 1: FMV Before Loss - FMV After Loss = Decrease in FMV
  • Step 2: Choose the lesser of the adjusted basis or the decrease in FMV
  • Step 3: (Lesser of the adjusted basis or the decrease in FMV) - Insurance Reimbursement = Business Casualty Loss
78
Q

Individual Taxation

What are the rules regarding NOL (After COVID)

A
  • The NOL deduction is limited to 80% of income
  • No carrybacks
  • Carryfowards can be reported indefinitely
79
Q

Individual Taxation

What are the rules regarding NOL (During COVID)

A
  • 80% of income is removed
  • NOL has Carrybacks for up to 5 years
  • NOL carryforward to fully offset income if the loss occurred in 2018, 2019 and 2020
  • If the first applicable year does not have taxable income, then the NOL would be applied to the next applicable year
80
Q

Individual Taxation

If the taxpayer is under the age of 59 1/2, how is the IRA distributions calculated on a 1040 Form?

A

Withdrawal Exceptions do not apply
* IRA distribution is taxed based on the marginal tax rate
* 10% penalty fee is included. The penalty fee is not subject to the marginal tax rate

Withdrawal exceptions do apply
* If the taxpayer takes out more than the exception, then the 10% Penalty fee will be applied to the difference of what was distributed and the amount applied to the exception

81
Q

Partnership Taxation

What is a Form 1065?

A
  • Form 1065 is the Partnership Tax Return
  • It is not used to pay income tax for the partners
  • It is used to calculate Ordinary income and deductions
82
Q

Partnership Taxation

What is a Schedule K and a Schedule K-1

A

Schedule K
* Schedule K is used to indicate specific revenues and expenses for the partner in the partnership
* Schedule K summarized all of the information that is reported in the Schedule K-1

Schedule K-1
* Allocates the partnership’s income, losses and any other items that may affect the partner’s individual tax liability

83
Q

Partnership Taxation

What are guaranteed payments?

A
  • A guaranteed salary to a partner is a set payment made for work that is done
  • Payment is made regardless of whether the business is profitable
  • The partner that receives the guaranteed salary reports it as income on their 1040
  • The partnership reports the guaranteed salary as an operating expense
84
Q

Partnership Taxation

How are partnership disbributions treated?

A

Partnership distributions are treated as a return of capital

85
Q

Partnership Taxation

How are gains and losses recognized for the partnership when transferring assets to partners?

A

Partnerships do not recognize a gain or loss when transferring assets to partners

86
Q

Partnership Taxation

When is a gain reported for a partner in a liquidating or non-liquidating distribution?

A
  • A gain is recognized when cash received is greater than the basis
  • A gain is reported as ordinary income for the partner in both a liquidating and non-liquidating distribution
87
Q

Partnership Taxation

In a liquidation distribution, how are gains and losses reported for the partner?

A

Only cash has been distributed:
* A gain is recognized when the cash distributed is more than the partner’s basis
* A loss is recognized when the cash distributed is less than the partner’s basis

Losses can only be reported when it is a cash-only distribution

88
Q

Partnership Taxation

How are gains and losses recognized when partner receives a non-cash distribution?

A

Since no cash is distributed, the partner would not recognize a gain because cash would need to be distributed in order to recognize a gain

89
Q

Partnership Taxation

When are losses allowed in a distribution?

A

Losses are allowed only in a partnership liquidation distribution

90
Q

Partnership Taxation

How are assets valued in a non-liquidating distribution?

A

Since the asset came into the partnership at basis, the asset will be valued at basis

FMV is not used in determining the partner’s basis

Example
Partner Basis: $160,000
Securities Basis: $34,000
Securities FMV: $220,000
Basis after Distribution: $126,000 ($160,000 - 34,000)

91
Q

Partnership Taxation

What is the partner’s basis in a non-liquidating distribution of capital assets?

A

Lesser of:
* The adjusted basis of the partnership’s basis in the asset
* The partner’s remaining basis in the partnership before the distribution

Example
Partner’s Basis before Distribution: $55,000
Adjusted Basis of Asset: $75,000
Amount of Asset Distribution: $55,000
Partner’s new basis after distribution: 0
No gain or loss is recorded

92
Q

Partnership Taxation

When a cash and non-cash distribution takes place, what is the adjusted basis of the non-cash property?

A

The adjusted basis of the non-cash property is the difference between the unadjusted basis and the amount of cash received

Example
Partner A has a basis of $50,000
Cash Distribution of $20,000
Distributions are a car with a FMV of $40,000 and cash of $35,000
Partner’s Basis after distribution: $30,000
Gain Reported: $0, since cash distribution is less than the basis

93
Q

Partnership Taxation

What are hot assets?

A
  • Unrealized receivables
  • Appreciated inventory
  • Any gain or loss as a result in a hot asset will be reported as ordinary income for the outgoing partner based on their share

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