Tax - Partnership Taxation Flashcards

Tax - Partnership Taxation

1
Q

True or false? Partnerships are a taxable entity.

A

False. Income and expenses flow through to the partner to be taxed via a Form K-1.

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2
Q

When exchanging property for a partnership interest; how is gain or loss recognized?

A

Neither gain nor loss is recognized in an exchange of property for a partnership interest. It is a non-taxable event.

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3
Q

What is a partner’s basis in partnership property?

A

Initial basis for partnership property is the basis of the property that was contributed or exchanged for the partnership interest.

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4
Q

When services are exchanged for a partnership interest; how is this treated for tax purposes?

A

It is a taxable event; treated the same as compensation for the services. The taxable income equals the % of partnership interest received times the FMV of the partnership. i.e. the FMV of the interest received is the taxable income for the service provider.

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5
Q

What is the partner’s basis in a partnership when they provide a service in exchange for the interest?

A

The basis in the partnership interest is the amount of taxable service revenue provided by service provider.

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6
Q

What is the holding period of an asset that has been contributed to a partnership?

A

The partnership inherits the holding period of the asset contributed. The exception of inventory- the holding period begins when contributed.

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7
Q

What is the tax treatment of startup costs for a partnership?

A

Tax treatment is the same as that of an individual taxpayer. However syndication fees are not deductible or amortized.

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8
Q

What deductions are subtracted from gross revenues to arrive at partnership income?

A

COGS Wages - except for partners Guaranteed payments to partners Business bad debt (if on accrual basis) Interest paid Depreciation (except section 179) Amortization (Startup costs; goodwill; etc)

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9
Q

How are partnership losses taken on an individual’s return?

A

Losses cannot be taken beyond a partner’s basis in the partnership Losses in excess of basis are carried forward until basis is available

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10
Q

When are guaranteed payments to a partner includable in taxable income?

A

They appear in partner’s income during the year in which the partnership’s fiscal year CLOSES.

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11
Q

How are partner benefits paid by the partnership treated?

A

Health insurance; life insurance and other benefits paid on behalf of the partner are treated as guaranteed payments and are includable as self-employment income.

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12
Q

How is net self-employment income from a partnership interest calculated?

A

Partner’s % share of ordinary income from partner’s K-1 + Guaranteed payments - Partner’s % share of section 179 expense from K-1 = Self-employment income (subject to SE tax)

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13
Q

In general; what is a partner’s basis in partnership property purchased?

A

Partner’s basis is basis of goods exchanged or for services exchanged is FMV of partnership interest received. If purchased; purchase price less liabilities incurred = basis. For a gifted interest in a partnership; gift basis rules apply.

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14
Q

Which items are not deductible on Schedule K of form 1065?

A

Foreign tax paid Investment interest expense Section 179 expense Charitable contributions Mnemonic: IFC179

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15
Q

Which items are not counted as income on Schedule K of form 1065?

A

Passive Income Portfolio Income 1231 Gain or Loss Mnemonic: PP1231

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16
Q

How is adjusted partnership basis calculated?

A

Beginning partnership basis + Capital contributions + Share of ordinary partnership income + Capital gains + Tax-exempt partnership income (DON’T FORGET!) = Ending partnership basis

17
Q

What items DECREASE partnership basis?

A

Money distributed Adjusted basis of property distributed Partners’s share of ordinary losses Partnership is relieved of a liability (considered a distribution)

18
Q

What INCREASES partnership basis?

A

Partnership getting a loan Capital contributions Ordinary income Capital gains Tax-exempt income

19
Q

How do liabilities either INCURRED or RELIEVED affect a partner’s basis in a partnership?

A

If the partnership gets a loan; this INCREASES basis. If partnership is relieved of a liability; this DECREASES basis.

20
Q

How do guaranteed payments affect partnership basis?

A

They do not affect basis- they are already included in ordinary income; which affects basis.

21
Q

What is the order in which basis is adjusted in a partnership?

A
  1. Increase basis (all items; including tax-exempt income) 2. Distributions 3. Losses (limited to basis)
22
Q

How is the taxable year of a partnership determined?

A

It must be the same as 50% of the partners and use the same tax year for 3 years once adopted.

23
Q

How does death of a partner affect the partnership’s taxable year?

A

The taxable year closes with respect to the decedent partner’s interest ONLY.

24
Q

When CAN’T a partnership use cash basis?

A
  1. They have inventories 2. Partnership is a tax shelter 3. Has a corporate partner 4. Gross receipts are $5 Million or more Exception: If gross receipts are $1 Million or LESS and Partnership maintains inventories; Cash method is ok.
25
Q

When does a partnership terminate?

A

When there is less than 2 partners (only one partner) When 50% of the partnership interests sell within a 12 month period- partnership IMMEDIATELY terminates.

26
Q

How is gain or loss on sale of a partnership interest calculated?

A

Gain or Loss = Amount realized on sale - basis in partnership interest

27
Q

What is the new basis of a partnership interest sold?

A

Basis = Capital account + Liabilities assumed

28
Q

How is the sale of non-capital partnership property treated?

A

As ordinary gain/loss. Items that fall into non-capital category would be unrealized receivables; appreciated inventory; and similar.

29
Q

How is a partner’s share of an ordinary gain calculated?

A

FMV of Assets (non-capital) - Adjusted basis of assets = Ordinary gain x Partner’s % interest = Partner’s share of gain Note: No gain or loss will be recognized by a partnership upon distribution of property.

30
Q

What is the order of basis reductions for distributions from a partnership?

A
  1. Money distributed 2. Adjusted basis of unrealized receivables and inventory 3. Adjusted basis of other property Note: Only MONEY distributions will trigger a gain in a partnership distribution.
31
Q

When can a LOSS occur in a partnership distribution?

A

Only in a liquidating distribution.

32
Q

What are the requirements for recognizing a gain in a partnership liquidating distribution?

A
  1. Money was distributed 2. Unrealized receivables were distributed 3. Appreciated inventories were distributed Otherwise; no loss recognized.