REG 42 - Partnership Taxation 2 - Flow Through/Partner Transactions Flashcards
What is the tax treatment of net losses in excess of the at-risk amount for an activity?
A. Any loss in excess of the at-risk amount is suspended and is deductible in the year in which the activity is disposed of in full.
B. Any losses in excess of the at-risk amount are suspended and carried forward without expiration and are deductible against income in future years from that activity.
C. Any losses in excess of the at-risk amount are deducted currently against income from other activities; the remaining loss, if any, is carried forward without expiration.
D. Any losses in excess of the at-risk amount are carried back two years against activities with income and then carried forward for 20 years.
B. Any losses in excess of the at-risk amount are suspended and carried forward without expiration and are deductible against income in future years from that activity.
PDK, LLC had three members with equal ownership percentages. PDK elected to be treated as a partnership. For the tax year ending December 31, year 1, PDK had the following income and expense items: Revenues $120,000 Interest income 6,000 Gain on sale of securities 8,000 Salaries 36,000 Guaranteed payments 10,000 Rent expense 21,000 Depreciation expense 18,000 Charitable contributions 3,000
What would PDK report as nonseparately stated income for year 1 tax purposes?
A. $30,000
B. $35,000
C. $43,000
D. $51,000
B. Non-separately stated income is the ordinary business income of the LLC, computed as follows: Revenues $120,000 Salaries (36,000) Guaranteed payments (10,000) Rent expense (21,000) Depreciation expense (18,000) Ordinary income $35,000
Dale’s distributive share of income from the calendar-year partnership of Dale & Eck was $50,000 in 2015. On December 15, 2015, Dale, who is a cash-basis taxpayer, received a $27,000 distribution of the partnership’s 2015 income, with the $23,000 balance paid to Dale in May 2016.
In addition, Dale received a $10,000 interest-free loan from the partnership in 2015.
This $10,000 is to be offset against Dale’s share of 2015 partnership income.
What total amount of partnership income is taxable to Dale in 2015?
A. $23,000
B. $37,000
C. $50,000
D. $60,000
C. Partners must report their share of the partnership’s income, deductions and other items on the partner’s income tax return in the calendar year in which the partnership’s tax year ends. Dale’s share of Dale and Eck’s 2015 income was $50,000. Thus, Dale must report $50,000 of partnership income in 2015.
Alt Partnership, a cash basis calendar year entity, began business on October 1, 2015. Alt incurred and paid the following in 2015:
*Legal fees to prepare the partnership agreement $12,000
*Accounting fees to prepare the representations in offering materials $15,000
Ignoring amortization, what was the maximum amount that Alt could expense on the 2015 partnership return?
A. $0
B. $5,000
C. $12,000
D. $15,000
B. $5,000 of organizational expenses may be deducted, but the $5,000 is reduced by the amount of expenditures incurred that exceed $50,000. Expenses not deducted must be capitalized and amortized over 180 months, beginning with the month that the corporation begins its business operations. Deductions are not allowed to the partnership or any partner for expenses incurred to sell partnership interests. Hence, $5,000 of the legal fees to prepare the partnership agreement may be deducted.
However, the accounting fees to prepare the representations in offering materials may not be expensed or amortized because these expenses are related to selling partnership interests.
Don Wolf became a general partner in Gata Associates on January 1, 2015 with a 5% interest in Gata’s profits, losses, and capital.
Gata is a distributor of auto parts. Wolf does not materially participate in the partnership business. For the year ended December 31, 2015, Gata had an operating loss of $100,000. In addition, Gata earned interest of $20,000 on a temporary investment. Gata has kept the principal temporarily invested while awaiting delivery of equipment that is presently on order. The principal will be used to pay for this equipment.
Wolf's passive loss for 2015 is A. $0 B. $4,000 C. $5,000 D. $6,000
C. Passive activity losses are the amount that total losses from passive activities exceed total gains from passive activities. The characterization of a partner’s share of the partnership’s income as passive or nonpassive depends on the partner’s participation in the partnership’s income earning activities.
Since Wolf did not materially participate in the partnership business, his share of the partnership’s operating loss, $5,000, is considered a loss from a passive activity. Passive income does not include portfolio income.
As a result, Wolf’s share of the $20,000 in interest income would not be passive. Therefore, since Wolf had no gains from passive activities to offset the loss from his share of the partnership’s operating loss, Wolf would have a passive loss of $5,000, equal to his share of the partnership’s operating loss.
Evan, a 25% partner in Vista Partnership, received a $20,000 guaranteed payment in 2014 for deductible services rendered to the partnership. Guaranteed payments were not made to any other partner. Vista’s 2014 partnership income consisted of:
Net business income before guaranteed payments $80,000
Net long-term capital gains 10,000
What amount of income should Evan report from Vista Partnership on her 2014 tax return? A. $37,500 B. $27,500 C. $22,500 D. $20,000
A. Guaranteed payments from a partnership for the services of a partner are treated as salary payments and, as a result, are made without regard to the partner’s share of the partnership’s income. Thus, Evan would treat the $20,000 payment from the partnership for services rendered as income on her 2014 tax return. She also must report her share of the partnership’s net income. Since the guaranteed payments qualify as a deductible expense, Vista’s partnership income may be reduced by the amount of the expense. Hence, the partnership’s income would be $70,000; $80,000 in net business income before guaranteed payments plus the $10,000 net long-term capital gain less the $20,000 guaranteed payment. Evan’s 25 percent share of the partnership’s income would be $17,500 (25 percent x $70,000). Thus, Evan would report $37,500 in income from the Vista Partnership on her 2014 tax return - the sum of the guaranteed payment ($20,000) and her share of the partnership’s income ($17,500).
White has a one-third interest in the profits and losses of Rapid Partnership. Rapid’s ordinary income for the 2014 calendar year is $30,000, after a $3,000 deduction for a guaranteed payment made to White for services rendered. None of the $30,000 ordinary income was distributed to the partners.
What is the total amount that White must include from Rapid as taxable income in his 2014 tax return? A. $3,000 B. $10,000 C. $11,000 D. $13,000
D. Guaranteed payments to partners from their partnership for partnership services or capital are not treated as partnership distributions. Instead, the payments are treated as salary payments to employees or interest payments.
Hence, White would have to include the $3,000 guaranteed payment on his 2014 tax return. In addition, since partnerships are pass-through for tax purposes, White must include his share of the partnership’s income on his tax return. White share of the partnership’s income would be $10,000 (= $30,000 in partnership income multiplied by White’s 1/3 share in profits and losses).
Therefore, the total amount that White must include from Rapid Partnership as taxable income in his 2014 tax return is $13,000, the sum of the $3,000 in guaranteed payments made to White and White’s share of the partnership’s income.
T/F: A sale of capital gain property by a controlling partner to a partnership will be taxed as a capital gain regardless of whether the asset is a capital asset in the hands of the partnership.
False.
Sales of capital gain property by a controlling partner (majority interest) to a partnership will be deemed noncapital if the asset is not capital in the hands of the partnership.
T/F: Sales of contributed capital assets with built-in gains will only generate gains to the contributing partner if the property is sold immediately after the contribution by the partnership.
False.
Misconception: There is NO time limit on the allocation of the amount of built-in gains and losses from sales of property. A time limit (five years) applies to the characterization of these gains and losses as ordinary or capital. Another time limit (seven years) applies to the distribution of built-in gain property (to partners).
T/F: Partners do recognize gains on contributions of appreciated property to a partnership unless the partner owns a majority interest in the partnership (greater than 50%).
False.
Sales of capital gain property by a controlling partner (majority interest) to a partnership will be deemed noncapital if the asset is not capital in the hands of the partnership.
