Taxes: Formation & Basis

Question 1

Taxes:

Partnership - Formation & Basis

Answer 1

Partnership - Formation & Basis

• a partnership is not a taxable entity (partners report regardless of distributions)
• may be exempt from partnership rules if formed for investment purpose
• partnership: association of 2+ individuals to make profit

Question 2

Taxes:
Partnership - Formation & Basis
“Check the Box” Regulations

Answer 2

“Check the Box” Regulations

• unassociated entities may elect to be taxed as a corp or a partnership
• “per se” corporations must be taxed as corp
• default rule is partnership if 2+ owners
• only effective if filed in first 75 days of year

Question 3

Taxes:
Partnership - Formation & Basis
General/Limited Partners

Answer 3

General/Limited Partners

• partnership loss is passive to limited partner
• partnership loss may be passive to GP depending on material participation test (rental is most likely passive)
• owners of LLC are “members”

Question 4

Taxes:
Partnership - Formation & Basis
Formations

Answer 4

Formations
- formation of partnership does not trigger income
- contributions are not taxable but must calculate basis
Deferred gain/loss: when contributions are to receive partnership interest (must have 80% control)
- no distinction between initial and later contributions
- do deferral if contribution in exchange for property
Exceptions for Non-Recognition
- service contributions create income and equals basis of ownership in interest-
- no deferal for disguised sales

Question 5

Taxes:
Partnership - Formation & Basis
Basis

Answer 5

Basis

• each partner calculates their adj basis (outside basis)
• partnership calculates adj basis of assets (inside basis)
• partnership takes carryover basis for contributed property
• partners take substitutes basis from assets contributed

Question 6

Taxes:
Partnership - Formation & Basis
Holding Period

Answer 6

Holding Period

• holding period of partnership interest includes holding period of assets for capital assets and section 1231. All others starts when assets contributed.
• partner’s holding period always goes to partnership
• adj basis for services is value included in income

Question 7

Taxes:
Partnership - Formation & Basis
Computation of Basis of Partnership Interests

Answer 7

Computation of Basis of Partnership Interests
Partnership Interest
+ increased by contributions of property, income, and increases in liabilities
- decreased by distributions, expenses, and deemed distributions, and decreases in liabilities
* partnership interest cannot be negative, must recognize a gain*
- limited partners are not allocated any share of recourse debt, but nonrecourse debt is allocated by partnership interest

Question 8

Taxes:
Partnership - Formation & Basis
Capital Account

Answer 8

Capital Account

• amount partner should receive upon liquidation
• difference from basis:
  
  • liabilities do not affect capital account
  • FMV of contributions and distributions impact the capital account rather than the tax basis

Question 9

Taxes:
Partnership - Formation & Basis
Permitted Tax Years

Answer 9

Permitted Tax Years
- partners only report income once partnership closes its books
Rules
- use same year-end as majority interest partner(s) 50%+
- if no majoirity, same year-end as all principle partners 5% P&L or more
- if neither then: least aggregate deferral
- can elect fiscal year-end or natural year end if business purpose
- Natural Year End: 25%+ of gross receipts occur in last 2 months of year