EA Part 2-Passkey 11-12 Partnerships

Question 1

Partnership

Answer 1

• unincorporated business with 2 or more members
• pass-through entity
• major advantage: not directly taxed on its income
• must have at least 1 general partner

Question 2

A joint undertaking merely to share expenses is__

Answer 2

not a partnership

Question 3

Form 8832

Answer 3

Form 8832 Entity Classification Election.
A domestic LLC with at least 2 members is classified as a partnership unless it files Form 8832 & elects to be treated as a corporation.

Question 4

Organization that are prohibited from being classified as partnerships:

Answer 4

• joint-stock companies or joint-stock association
• insurance companies & certain banks
• government entities & certain foreign organizations
• any tax-exempt(nonprofit) organization
• any real estate investment trust (REIT)
• any trust or estate
• any organization that elects to be corp. by filing Form 8832
• corporation (although Corp. can be a partner is a partnership)

Question 5

“Partnership Agreement” refers to any __

Answer 5

written document or oral agreement that bears on the underlying economic arrangement of the partners, including allocations of income, gain, loss, deductions & credits

Question 6

A partnership agreement may be modified during the tax year and even after the tax year has closed, but not after __

Answer 6

the due date for filing its tax return, NOT including extensions.

Question 7

A “natural business year” is a 12-month period where at least __% of ___

Answer 7

25% of total gross receipts are received in the last 2 months of the year.

Question 8

A partnership may request a fiscal year that does not conform to the tax year of its partners, without a legitimate business purpose, by making a ___

Answer 8

section 444 election.

Question 9

Every partnership must file a tax return unless __

Answer 9

it has no activity whatsoever (no income or losses during the year)

Question 10

A partnership files on the 15th day of the __th month and may request a ___ month extension.

Answer 10

4th month (like individuals)
5-month extension

Question 11

Form 7004

Answer 11

Form 7004 Automatic Extension of Time to File Certain Business Income Tax, Information or Other Returns

Question 12

The IRS requires partnerships with more than ___ partners (K-1’s) to file their returns electronically.

Answer 12

100

Question 13

The penalty for late filing is $__ per month, per partner, for up to __ months.

Answer 13

$195/mth/partner

12 months

Question 14

Partners are not employees, therefore no withholding is taken out. General partners are considered to be __

Answer 14

self-employed and thus must pay estimated payments.

Question 15

Limited partners are subject to self-employment tax only on __

Answer 15

guaranteed payments, such as salary and professional fees for services rendered.

Question 16

A limited partnership (LP or LLP) is formed under _

Answer 16

state limited liability law. They usually offer professional services (attorneys, doctors, etc.). LLP protects individual partners from liability for malpractice of other partners.

Question 17

A capital interest in a partnership is an interest in its assets that is __

Answer 17

distributable to the owner of the interest if

• the owner withdraws from the partnership or
• the partnership liquidates.

Question 18

Family members will be recognized as partners only if either the __

Answer 18

• family member treats the activity a bona fide business activity; actually controls their interest
• or some capital or service is provided by each partner & they have agreed to share in profits

Question 19

A loss on the sale or exchange of property between related persons is not deductible. An individual is considered as also owning __

Answer 19

the partnership interest directly or indirectly owned by his family (brothers, sister, spouses, ancestors, descendants)

Question 20

For a husband & wife to be a “qualified joint venture,” both spouses must

Answer 20

1) materially participate
2) be the only members in the venture
3) file a joint tax return

Question 21

Form 4562 Depreciation and Amortization is used to elect to __

Answer 21

amortize or capitalize start-up and organizational costs over 180 months. Election irrevocable.

Question 22

Guaranteed payments are generally deducted on Form __

Answer 22

1065 as a business expense and reported on Schedule K-1.

Question 23

The partner who receives a guaranteed payment reports the full amount as __

Answer 23

ordinary income on Schedule E/Form 1040 for the tax year in which the partnership tax year ends.

Question 24

Guaranteed payments are not subject to __

Answer 24

income tax withholding.

Question 25

When a partner contributes property to a partnership, the partnership’s basis is generally __

Answer 25

the same as the adjusted basis of the partner, including any gain recognized by the partner in connection with the contribution.

Question 26

If a partner receives a capital interest as compensation for services, the partner must __

Answer 26

recognize ordinary income equal to the FMV of the partnership interest that is transferred in exchange for services. Treated as a guaranteed payment.

Question 27

“Outside basis”

Answer 27

Refers to a partner’s basis in his partnership interest .

Question 28

“Inside basis”

Answer 28

A partnership’s basis in its assets

Question 29

Items that increase a partner’s basis in the partnership are a partner’s ___

Answer 29

+additional cash contributions to pshp
+increased liabilities
+increased share (or assumption of) pshp liabilities
+distributive share of pshp income
+distributive share of the excess of the deductions for depletion over the basis of the depletable ppt

Question 30

Items that decrease a partner’s basis in the partnership:

Answer 30

• money & adj basis of ppt distributed to the partner by the pshp
• partner’s distributive share of pshp losses
• partner’s distributive share of nondeductible pshp expenses that are not capital expenditures; 179 expenses
• partner’s deduction for depletion for any oil & gas wells

Question 31

In a constructive liquidation, the following events are treated as occurring at the same time:

Answer 31

• all pshp liabilities become payable in full
• all pshp assets have $0 value, except for ppt contributed to secure a liability
• all ppt is disposed of in a fully taxable transaction for no consideration
• all items of income, gain, loss or deduction are allocated to the partners
• the pshp liquidates

Question 32

Because a pshp is a flow-through entity, each partner is taxed on his distributive share of income, whether or not __

Answer 32

it is actually distributed.

Question 33

Any gain or loss on a sale or exchange of unrealized receivables or inventory items a partner received in a distribution is treated as __

Answer 33

ordinary income or loss.

If inventory held for more 5 years, gain would be capital gain, provided inventory was a capital asset at time of sale

Question 34

A partner cannot have a negative partnership basis. If a partner has distributions that exceed his adjusted basis during any tax year, the excess is __

Answer 34

generally treated as a capital gain to the partner.

Question 35

Any partnership losses and deductions that exceed the partner’s basis may be carried forward __

Answer 35

indefinitely until the partner’s basis in the pshp increases.

Question 36

A partnership interest is a capital asset, which typically means __

Answer 36

any gain or loss on the sale or exchange of a pshp interest is treated as a capital gain or loss.

Question 37

A partnership liquidation happens when

Answer 37

– a pshp dissolves or stops doing business; a partner can die, or a partner drops out of the business

Question 38

A partnership terminated when one of these events takes place:

Answer 38

1) all operations are discontinued
2) at least 50% of the total interest in pshp capital and profits is sold or exchanged within a 12-month period, including a sale or exchange to another partner

Question 39

If a partner pay any part of an insolvent partner’s share of debts, –

Answer 39

he can take a bad debt deduction.

Question 40

No deduction of a loss is allowed if a sale or exchange between two partnerships in which the same persons directly or indirectly own more than __

Answer 40

50% of the capital or profits interests in each partnership.