Partnerships Pt. 2 Flashcards
How are guaranteed payments treated in a partnership?
it is compensation paid to a partner for services provided or use of capital and is taxable ordinary income to the partner and is an allowable tax deduction to the partnership
How are organizational expenditures and start-up costs treated in a partnership?
the partnership may elect to deduct up to $5k for both organizational and start-up costs ($10k total); any amount exceeding this is amortized over 180 months (beginning in the month the trade/business begins)
T/F: deducting a loss with a partnership is the same as with an S corp
True; the partner must clear 4 hurdles:
tax basis limitation, at-risk limitation, passive activity loss (PAL) limitation, and excess business loss limitation
both tax basis and at-risk basis limitations are applied at the entity level while the PAL and excess business loss limitations are applied at the individual level
How is a nonliquidating distribution treated?
it is generally nontaxable to both the partner and the partnership
the distribution reduces the partner’s basis in the partnership by the cash or adjusted basis (NBV) of the property received; it is first reduced by cash and then by property
How does a property distribution affect a partner’s basis?
the partner’s basis is generally the same as the partnership’s basis; however, the basis of the property may be reduced if the partner doesn’t have sufficient basis in the partnership (this is to prevent a negative basis in the partnership)
How does a cash distribution affect a partner’s basis?
if the cash received is greater than the partner’s basis in the partnership, the partner recognizes a capital gain for the excess (this is to prevent a negative basis in the partnership)
Definition of a limited liability company (LLC)
it is a separate legal entity from its owners where the owners are not personally liable for the obligations of the business; all members have limited liability which is different from a limited partnership where at least one general partner is personally liable for all partnership debts
What are some key distinctions for an LLC?
it provides similar protection from liabilities as a corporation but does not have the “double taxation” of a corporation if the LLC is taxed as a partnership
LLC members generally have the right to amend the LLC operating agreement, provide input, and manage LLCs, yet corporate shareholders generally do not have those rights
S corps have restrictions on the type and number of shareholders they may have while LLCs do not have this restriction
a sole proprietorship may become a single member LLC if it files articles of organization with a state
Taxation of an LLC
for federal income tax purposes, an LLC is treated as either a partnership, corporation, or sole proprietorship
an LLC with at least 2 owners is taxed as a partnership unless an election is made to have it taxed as a C corp
a single member LLC is considered a disregarded entity for federal income tax purposes; it is treated as a sole proprietorship if the owner is an individual, and included in the corporation’s taxable income if the owner is a C corp
