Section 4: Partnership Tax

Question 1

Partnership Tax Return

Answer 1

Form 1065

Due 4/15

Question 2

Partnership Creation

Answer 2

Informal creation since all partnerships have unlimited liability (everything is “at-risk”)

Question 3

Outside Basis

Answer 3

partner basis in th P/S

Question 4

Inside Basis

Answer 4

Partnership basis in their “assets”

Question 5

Guaranteed Payment

Answer 5

• Taxable to the partner receiving payment - subject to SE tax
• Deductible to the P/S as ordinary expense
• Not based on income, should be for services or use of capital

Question 6

Partnership Outside Basis Equation

Answer 6

Initial Outside Basis

+/- Income/Loss

+/- Muni Bond Int

+/- Separate Stated Item

• Distributions Rec’d from P/S

+ Your % of P/S Liabilities

- Liabilities consumed to P/S

Ending Outside Basis

Question 7

Partnership Tax Year

Answer 7

Partnerships are normally required to adopt the tax year as that of the partners or majority of partners

Question 8

Partnership Distributions

Answer 8

• Non-Liquidating (Current Distributions) - the partner continues in the business after the distribution
• Liquidating - the distribution is in settlement of the partner’s entire interest in the business

Question 9

Amount realized when partner terminates ownership

Answer 9

Cash and Property received

+ Relief from debt

Question 10

Partnership terminates when…

Answer 10

• The business and financial operations are discontinued
• The business is reduced to one partner
• 50% or more of partnership tranfers within a 12 month period

Question 11

Limited Liability Company

Answer 11

• Taxed as flow through entity unless elected otherwise
• Advantages
  
  • Separate from owners
  • can sue and be sued
  • Members only liable to the amount of their investments
• Disadvantages
  
  • If a member leaves, LLC dissolves
    
    • Remaining members must create new LLC
  • LLC members are considered self-employed and must pay SE tax

Question 12

Limited Liability Partnership

Answer 12

• Like general partnership, except partners in LLP are not liable for the actions of other partners

Question 13

Large Partnership

Answer 13

• Partnership that may elect to be a large partnership, file Form 1065-B
• Must have 100 or more partners in prior year
• P/S may have to pay certain taxes, like recapture of investment tax credit, all other items are passed through to partner