REG 5 - Partnerships: Part 2

Question 1

What is taxable income for a partner in a partnership?

Answer 1

Taxable income = share of partnership income (even if not received)

Question 2

Is income taxable? What is the basis impact of income? Are withdrawals taxable? What is the basis impact of withdrawals?

Answer 2

Income is TAXABLE. Basis is INCREASED.

Withdrawals are NONTAXABLE. Basis is DECREASED.

Question 3

What are the three hurdles that losses must cover in order to be deducted? How are losses that are deductible deducted?

Answer 3

Losses that pass the following below hurdles are deductible against a partner’s ordinary income.

1) Tax basis
2) At - Risk amount
3) Passive activity

Question 4

Define how losses are limited to a partner’s tax basis?

Answer 4

Partnership’s loss deduction is limited to the partner’s adjusted basis

Question 5

Define how losses are limited to a partner’s at-risk amount?

Answer 5

At-risk amount is similar to tax basis but it does NOT include certain NONRECOURSE liabilities.

Question 6

Define the difference between NONRECOURSE and RECOURSE?

Answer 6

Nonrecourse - means the partners are NOT personally liable.

E.g. Partnership takes loan to build building. The loan is DEFAULTED. The partner’s with the nonrecourse loans are NOT personally liabile.

Recourse - means the partners are personally liable.

E.g. Partnership takes loan to build building. The loan is DEFAULTED. The partner’s with the recourse loans are personally liable.

Question 7

Difference between general partners and limited partners?

Answer 7

General partners are ALWAYS LIABLE

Limited partners are NOT LIABLE

E.g. Partnership has $60,000 in nonrecourse liabilities and $30,000 in recourse liabilities. A,B,C own 1/3 each with A being general partner.

What is the basis of each partner? What is the at-risk amounts of each partner?

Partner A
Tax basis - 50,000 (30,000 + (60,000 x 1/3)
At-risk amount - 30,000

Partner B
Tax basis - 20,000 (60,000 x 1/3)
At-risk amount - 0

Partner C
Tax basis - 20,000 (60,000 x 1/3)
At-risk amount - 0

Question 8

Rachel is an ACTIVE participant in a partnership with an initial cash contribution of $20,000. Rachel was allocated $5,000 of recourse debt that she guaranteed and $8,000 of nonrecourse debt. There is a $35,000 loss.

Answer 8

Basis
$20,000 - Initial
$5,000 - Recourse
$8,000 - Nonrecourse
= $33,000

At-risk amount
$20,000 - Initial
$5,000 - Recourse
$0 - Nonrecourse
= $25,000

• Of the $35,000 loss, there is a carryforward of $2,000 for tax basis loss and a carryforward of $8,000 for at-risk loss. $10,000 all together

Question 9

Rachel is a NONACTIVE participant in a partnership with an initial cash contribution of $100,000. Rachel was allocated $20,000 of recourse debt that she guaranteed and $30,000 of nonrecourse debt. There is a $50,000 loss.

Answer 9

Basis
$100,000 - Initial
$20,000 - Recourse
$30,000 - Nonrecourse
= $150,000

At-risk amount
$100,000 - Initial
$20,000 - Recourse
$0 - Nonrecourse
= $120,000

Of the $50,000 loss, there is no carryforward because it crosses the basis hurdle and at-risk amount hurdle.

Because Rachel is a NONACTIVE participant, she can allocate the $50,000 as passive loss.

Question 10

How are guaranteed payments to partners treated for tax deductions on partnership tax return? How are guaranteed payments treated to the partner receiving?

Answer 10

Guaranteed payments are allowable tax deductions on the partnership tax return.

Guaranteed payments are income to the partner receiving.

Question 11

How are salaries to partners treated for tax deductions on partnership tax return? How are salaries treated to the partner receiving?

Answer 11

Salaries to partners are not a tax deduction. They are considered draws or distributions.

Salaries are income to the partner receiving.