Unit 13: Direct Participation Programs Flashcards
Illiquid investments that pass income, gains, losses, and tax benefits to limited partners
Direct Participation Programs (DPPs)
One of the most common types of DPPs
Limited Partnerships (LPs)
Three advantages of Limited Partners
1) An investment managed by others
2) Limited Liability
3) Flow-through of income and certain expenses
Main disadvantage of DPPs
Lack of liquidity
DPPs are generally structured as _________ or ________. These business forms are not tax-paying entities like corporations; instead they only report income and losses to the IRS and then the partners (in ________) or shareholders (in ___________) have the responsibility to report income and losses individually and pay the taxes due.
Limited Partnership or Subchapter S Corporation
How can LPs be sold?
Through private placement or public offerings
In a private placement for LPs, investors receive a __________ for disclosure and are involved in a _____ group of accredited investors.
Private placement memorandum; small group of accredited investors
Public offerings of LPs are sold with ________ to a larger number of limited partners.
prospectus
The _______ oversees the selling and promotion of the partnership.
Syndicator
Three important documents are required for a LP to exit:
1) The certificate of limited partnership (filed in home state)
2) The partnership agreement
3) The subscription agreement
To dissolve a LP, ______ must cancel the certificate of limited partnership and settle accounts.
GP (General Partner)
GP must cancel the certificate of limited partnership and settle accounts in the following order: when dissolving a LP:
Secured lenders, other creditors, limited partners, general partners
What are the two methods applied to the analysis of DPPs
Cash flow analysis and Internal Rate of Return (IRR)
Compares income (revenues) to expenses
Cash Flow Analysis
Determines the present value of estimated future revenues and sales proceeds to allow comparison to other programs
Internal Rate of Return (IRR)
Unique investment opportunities that permit the economic consequences of a business to flow through to investors. These programs offer investors a share in the income, gains, losses, deductions, and tax credits of the business entity.
Limited partnerships (LPs)
A small number of limited partnership interests are negotiable and trade on the OTC and exchanges
Master Limited Partnerships (MLPs)
Means that all of the income and losses and corresponding tax responsibilities go directly to the investors with no taxation to the business entity.
Flow-through (or pass-through)
When there is potential for returns from cash distributions and capital gains, it is said to be ________ ________.
Economically viable
Applies to the using up of natural resources, such as oil and gas
Depletion allowances
Applies to cost recovery of expenditures for equipment and real estate (land cannot be depreciated)
Depreciation write-offs
The point at which the program begins to generate taxable income instead of losses. This generally occurs in later years when income increases and deductions decrease.
Crossover point
Are the only investment opportunity that you will study that offer a pass-through of losses to the investor. Also ________ passive losses shelter passive income, not ordinary income.
Direct Participation Programs (DPPs)
Any DPP established without a profit motive or with the intention of only generating tax losses for investors may be determined as _______
Abusive
Which characteristics of a corporation are hard to avoid in a DPP?
Centralized management