Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

ISEA-2019-BUS > BUSINESS - PARTNERSHIPS > Flashcards

BUSINESS - PARTNERSHIPS Flashcards

1
Q

Who pays taxes in a Partnership?

A

The partnership does not pay income taxes.

The income of the partnership flows to the individual partners and the individual partners pay taxes on it.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Partnership Tax Year

A

Partnership tax year is the same as the partner’s who own a majority.

If no majority owners have same tax year, look at the principal partners (owning more than 5%).

A partnership can select a tax year that is different from what is required, but only if the selected tax year is no more than three months different from the tax year that should be used.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Partnership Accounting Decisions

A

Most major tax accounting decisions will be made at the partnership level.

Depreciation Method
How to account for Inventory
Etc

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Organization and Syndication Costs

A

Organization costs are those costs to actually establish the existence of the partnership.

Attorney’s Fees
Filing Costs
Etc

Up to $5,000 of organization costs may be deducted in the year incurred (this deduction is phased out by $1 for each $1 of organizational costs in excess of $50,000).

Any remaining organizational costs must be capitalized and amortized over 15 years (180 months).

Syndication costs are those costs associated with selling the partnership interests to partners.

These are not deductible for federal income tax purposes at all.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Filing Partnership Return

A

The partnership tax return is due by the 15th day of the 3rd month following the date its tax year ended.

The tax return (Form 1065) is an information return only.

Schedule K is attached to the partnership return and on Schedule K will be the summary of how the partnership reports its taxable items of income, deduction, credit, etc.

Schedule K is then divided into “baby” schedules known as K-1s.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Partnership Income

A

This income flows through to the Partners, who pay taxes on their individual Tax Returns.

However, not all income flows together to the partners.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Partnership Income - Separately Stated Items

A

These are separately stated because the treatment of these items may be different based on the individual tax situations of each of the individual Partners.

They are:
1. Long-term and short-term capital gains and losses

  1. Charitable contributions
  2. Dividends, interest (including tax-exempt) and royalty income
  3. Section 179 deductions (accelerated depreciation)
  4. Passive losses from rental activities
  5. Section 1231 gains and losses
  6. Unrecaptured Section 1250 gains and losses
  7. Foreign taxes paid
  8. Interest expense on investment indebtedness
  9. Tax-exempt income.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Sharing Distributable Income/Items

A

Income shared as per partnership agreement.

If agreement is silent, gains shared equally.

Losses can be shared in any way – and differently than income.

If partnership agreement is silent, then shared as gains are shared.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Guaranteed Payments

A

A payment that is made to a partner that is not dependent upon the profit or loss or results of the partnership.

Guaranteed payments are like a salary and are treated differently from a distribution of partnership income.

Guaranteed payments are generally deductible by the partnership in the calculation of ordinary partnership taxable income.

Classified as Self-Employment income on the partner’s personal return.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Initial Basis of a Partner

A

The initial basis that the partner will have and the how it will be recorded depends on what the partner contributed to the partnership in return for their partnership share.

The basis is usually valued at what was contributed.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Partner’s Contributions to the Partnership

A

Contribution of services

Contribution of property

Contribution of services and property

Assumption of partnership liabilities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Contribution of Services

A

When services are contributed for a partnership interest, the contributing partner must recognize ordinary income equal to the fair market value of the partnership interest minus any cash that was also paid for the interest (if any).

The new partner’s interest will be recorded as a portion the FMV of the partnership.

So, if the FMV of the Partnership is $60K and the Partner is given 25% capital interest, his compensation will be $15K. ($60K x 25% = $15K).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Admitting A New Partner

A

A new partner can only be admitted with the unanimous consent of all partners.

Any new partner can only be held liable for the future debts of the partnership not in existence at the time of his/her inclusion in the partnership.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Withdrawal of a Partner

A

When a partner withdraws or leaves the partnership, there may be an agreement by which the partnership will not hold the departing partner liable for any past, present or future liabilities of the partnership.

Thought the Partnership agrees not to hold the Partner liable, this does NOT mean the creditors aren’t allowed to go after the departed partner.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Dissolution of Partnership

A

If there is a specified term, it is dissolved at the end of the term.

If no specified term, there are different ways it can be dissolved.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Dissolution of Partnership-At-Will

A

If a partnership agreement is silent as to duration of partnership, then the partnership is “at-will” and any of the partners can terminate at any time without incurring liability.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Rightful / Wrongful Dissolution

A

The partnership agreement determines if it is Rightful Dissolution or not.

Rightful Dissolution – If the departure does not violate any terms of the partnership agreement. The departing partner incurs no additional liability as a result of departure.

Wrongful Dissolution – If, by leaving, the partner violates the partnership agreement, then he or she is liable to the other partners for any resulting damages that result from their departure.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Dissolution by Operation of Law

A

Any of the partners die

The partnership or any individual partner is adjudicated bankrupt, or

There is subsequent illegality regarding the subject matter or composition of the partnership. (e.g. It was legal when we started, but no longer)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Dissolution Through Court Order

A

A court may order the dissolution of a partnership under equity.

Since it was court ordered, there is no liability for partners.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Notification of Dissolution

A

A dissolved partnership, unless it dissolved as an operation of law, notify all third parties with whom the partners have dealt in order to sever the apparent authority of the partners or other agents.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Winding Up the Partnership

A

After dissolution, a partnership continues in existence long enough to settle all outstanding debts and complete unfinished transactions. This is called the winding up process.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Distribution of Partnership Assets

A

MARSHALLING OF ASSETS RULE - Partnership creditors have first claim on partnership assets before proceeding against an individual partner’s personal assets.

Claims of general creditors. Creditors are paid FIRST.

Debts owed to individual partners through items as a loan to the partnership.

Any remaining sums are distributed based on the final capital balances of the partners’ contributions.

Any payments to partners in respect to profits.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Continuation of Partnership

A

An existing partnership shall be considered as continuing if it is not terminated.

A Partnership is considered Terminated only if no part of any business, financial operation, or venture of the partnership continues to be carried on by any of its partners.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Sale of Partnership Interest

A

When a partner sells his partnership interest, they may have a capital gain or loss or an ordinary gain.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Cold Assets and Hot Assets

A

Capital assets are called cold assets.

The sale of cold assets leads to a capital gain or loss.

Unrealized receivables and substantially appreciated inventory are hot assets.

The sale of hot assets leads to an ordinary gain or loss.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

New Partner’s Basis

A

The new partner’s basis in the partnership will be equal to the fair value of any money or property that is paid for their share.

This amount will be increased for any liabilities of the partnership assumed by the new partner, and decreased by any liabilities of the new partner that are assumed by the partnership.

27
Q

Contribution of Services and Property

A

The basis of the partnership interest should equal the FMV of partnership share received minus any gain on the sale of assets (adjusted basis to the partner minus the fair market value at the time of contribution).

28
Q

Assumption of Partnership Liabilities

A

The entering partner assumes a portion of the existing partnership liabilities.

The partnership assumes a portion of the new partner’s personal liabilities that are transferred to the partnership.

This will in effect decrease the partner’s basis. BUT, the basis CAN NOT be reduced below ZERO. You can not have a negative basis in a Partnership.

On joining a Partnership, a new Partner does not assume any of the pre-existing liabilities of the Partnership. However, they will be responsible for any liabilities incurred after they become a Partner.

So, the new Partner may assume a portion of the liabilities that the Partnership took from the new Partner. For example, if the new Partner contributed property with a loan, they will have to take a portion of that loan liability right back.

29
Q

What happens when there is a GAIN on Entrance of a Partner, by the Partner?

A

When the entering partner is relieved of more liabilities than the basis of the property he or she contributes, and only if this happens, the entering partner will have taxable gain on their admission to the partnership.

30
Q

Calculating the Entering Partner’s Basis in the Partnership.

A

Money contributed
+
The adjusted basis of any property contributed
−
Any of the new partner’s personal liabilities assumed by the partnership
+
The new partner’s share of any partnership liabilities. (ie. a portion of the liability the new Partner gave to the Partnership)
+
Gain recognized by the entering partner (ONLY if they are relieved of liabilities greater than their basis in the contributed property)
=
Partner’s basis in the partnership

31
Q

Holding Periods and Partnership’s Basis in Property Contributed

A

The partnership’s basis in the asset (property) contributed is equal to the basis of the partner in the asset plus any gain recognized by the partner on the transfer. Its holding period is that of the partner’s.

32
Q

Partner’s Holding Period

A

The partner’s holding period for the partnership interest is the holding period of the property contributed.

If just money were contributed, the holding period for the partnership interest would be as of the date of contribution.

33
Q

Partner’s Adjusted Basis

A

Generally, the income that flows to the individual partners will increase the partner’s basis in the partnership.

Each item that flows through to the partner that represents a deduction or loss will decrease the partner’s basis.

34
Q

Partner’s Treatment of Loss

A

A partner can only recognize loss to the extent that they have positive basis. The basis CANNOT BE REDUCED BELOW ZERO.

If a partner cannot recognize the current year loss items for any reason (including that their basis is smaller than the losses), the excess losses are carried forward waiting for additional basis in the future so that they can be deducted against future profit.

35
Q

Other Impacts on Partner’s Basis

A

Money and property contributed to the partnership by the partner and money and property distributed to the partner also increase, and decrease, respectively, the partner’s basis in the partnership.

Additionally, a partner’s basis includes the partner’s share of the partnership’s liabilities.

36
Q

Impact of Liabilities on Basis

A

An increase in the liabilities of the partnership increases the individual partners’ basis based on their ratio of sharing profits and losses.

A decrease in the liabilities of the partnership decreases the individual partners’ basis.

37
Q

2 types of Distributions FROM the Partnership

A

Non-liquidating distributions

Liquidating distributions

38
Q

Contribution of Property

A

When only property is contributed in exchange only for a partnership interest, NO GAIN or LOSS is recognized by the partner or by the partnership.

The basis of the partnership share will be the basis of the property contributed.

If the property is exchanged for a partnership share and something else, then a gain may be recognized.

39
Q

Section 751 Property

A

Also known as HOT ASSETS,

That is Unrealized Receivables and Inventory items.

Income generated from the sale of HOT ASSETS is generally taxed as Ordinary Income (higher), rather than Capital Gain.

NOTE: the basis of Unrealized Receivables is $0 for partnerships using CASH METHOD accounting.

40
Q

Name examples of Unrealized Receivables

A

These are right to be paid for services or goods which are NOT Capital Assets, such as:

Goods delivered if payment would be treated as received for property other than capital assets

Services rendered or to be rendered

Items of potential gain that would be ordinary income if the following property were sold at its FMV on the date of payment:

  • Mining property for which exploration expenses were deducted
  • Stock in a Domestic International Sales Corp (DISC)
  • Certain farmland if costs for soil and water conservation or land clearing were deducted.
  • Franchise, trademarks, or trade names
  • Oil or gas property for which intangible drilling and development costs were deducted.
  • Stock of certain controlled foreign corporations
  • Market discount bonds and other short-term obligations
  • Property subject to recapture of depreciation under Sections 1245 and 1250.

NOTE: The term Unrealized Receivables also covers potential depreciation recapture.

41
Q

Define Substantially Appreciated Inventory

A

Substantially Appreciated Inventory is inventory that, at the time of the distribution, has a FMV that is more than 120% of the partnership’s adjusted basis for the property.

42
Q

Guaranteed Payments are generally deducted as a business expense, by a Partnership, on Form 1065.

True or False?

A

True.

43
Q

Non-Liquidating Distributions

A

Normally the partner should recognize no gain or loss on the distribution of money or other property by the partnership.

This is accomplished by using any other asset that is distributed as the “balancing amount” and valuing it so as to avoid gain/loss.

The partner will recognize a gain only if the cash distributed exceeds the partner’s adjusted basis in his partnership interest.

44
Q

Basis of Distributed Property

A

Equal to the basis of such property in the partnership’s hands immediately before the distribution.

However, this basis is limited to the basis of the partner’s interest in the partnership minus any money distributed in the same transaction (aka distribution).

The partner’s basis in the partnership will be reduced by their recorded basis in the property received (including cash).

45
Q

Liquidating Distributions

A

There may be a gain or a loss on a liquidating distribution.

46
Q

Gain on Liquidating Distribution

A

In a liquidating distribution, the partner will recognize a gain only if the distribution of money exceeds the basis in the partnership.

Any property that is distributed will have a basis to the partner that is equal to the partner’s adjusted basis in the partnership minus the value of any money received in the distribution.

47
Q

Loss on Liquidating Distribution

A

A partner recognizes a loss ONLY if the assets distributed in the liquidation are comprised only of money, unrealized receivables or inventory.

The loss is the partner’s basis minus the partnerships’ basis in money, unrealized receivables and inventory that are distributed to the partner.

However, if other property is involved, then we play around with the basis of that property to avoid gain or loss.

48
Q

Admitting A New Partner

A

A new partner can only be admitted with the UNANIMOUS CONSENT of all partners.

Any new partner can only be held liable for the future debts of the partnership not in existence at the time of his/her inclusion in the partnership.

49
Q

Withdrawal of a Partner

A

When a partner withdraws or leaves the partnership, there may be an agreement by which the partnership will not hold the departing partner liable for any past, present or future liabilities of the partnership.

This only has a limited effect. B/c thought the Partnership may not hold the Partner liable, the CREDITORS still may go after this partner.

50
Q

Dissolution of Partnership

A

If there is a specified term, the Partnership is dissolved at the end of the term.

If no specified term, there are different ways it can be dissolved.

No documents need to be filed with the state to dissolve a Partnership.

51
Q

Dissolution of Partnership-At-Will

A

If a partnership agreement is silent as to duration of partnership, then the partnership is “AT-WILL” and any of the partners can terminate at ANY time without incurring liability.

This is simply one Partner saying I’m done, without incurring any liability.

An At-Will Dissolution doesn’t require the agreement of the other Partners, the Creditors, or the Courts. Even if it is contrary to the terms of the agreement… unless it’s deemed Wrongful based on the terms.

52
Q

Rightful / Wrongful Dissolution

A

The partnership agreement determines if it is Rightful Dissolution or not.

Rightful Dissolution – If the departure does not violate any terms of the partnership agreement. The departing partner incurs no additional liability as a result of departure.

Wrongful Dissolution – If, by leaving, the partner violates the partnership agreement, then he or she is liable to the other partners for any resulting damages that result from their departure.

53
Q

Dissolution by Operation of Law

A

Happens when:

Any of the partners die

The partnership or any individual partner is adjudicated bankrupt, or

There is subsequent illegality regarding the subject matter or composition of the partnership. (It may have been legal when it started.)

54
Q

Dissolution Through Court Order

A

A court may order the dissolution of a partnership under equity.

An example is if a partner becomes incapacitated and can no longer participate. This is done through the courts.

55
Q

Notification of Dissolution

A

A dissolved partnership, unless it dissolved as an operation of law, notify all third parties with whom the partners have dealt in order to sever the apparent authority of the partners or other agents.

56
Q

Winding Up the Partnership

A

After dissolution, a partnership continues in existence long enough to settle all outstanding debts and complete unfinished transactions. This is called the winding up process.

During this process, business continues.

The last people to get the money are the partners.

57
Q

Distribution of Partnership Assets

A

A.K.A - Marshaling of Assets Rule

Partnership CREDITORS HAVE FIRST CLAIM on partnership assets before proceeding against an individual partner’s personal assets.

Claims of general creditors.

Debts owed to individual partners through items as a loan to the partnership.

Any remaining sums are distributed based on the final capital balances of the partners’ contributions.

Any payments to partners in respect to profits.

58
Q

Continuation of Partnership

Ownership Changes

A

An existing partnership shall be considered as continuing if it is not terminated.

A Partnership is considered Terminated only if no part of any business, financial operation, or venture of the partnership continues to be carried on by any of its partners.

59
Q

Calculation of Gain or Loss of the outgoing Owner

During an Ownership Change of a Partnership.

A

Total of cash, or other property received
+
Partnership liabilities assumed by new partner
-
Old Partner’s basis in the Partnership Interest
=
Total Gain or Loss.

How is this classified? It is based on the sale of Cold and Hot assets.

60
Q

Cold Assets and Hot Assets

A

Capital assets are called COLD ASSETS.

The sale of COLD assets leads to a CAPITAL gain or loss. A.K.A. - A sale of the Partnership Interest.

Unrealized receivables and substantially appreciated inventory are HOT ASSETS.

The sale of HOT assets leads to an ORDINARY gain or loss.

61
Q

New Partner’s Basis

A

The new partner’s basis in the partnership will be equal to the fair value of any money or property that is paid for their share.

This amount will be increased for any liabilities of the partnership assumed by the new partner, and decreased by any liabilities of the new partner that are assumed by the partnership.

62
Q

The rule for a Partner getting a distribution from the Partnership is as follows:

A

A partner generally recognizes gain on a partnership distribution ONLY to the extent any money (and marketable securities treated as money) included in the distribution EXCEEDS the adjusted basis of the partner’s interest in the partnership. Any gain recognized is generally treated as capital gain from the sale of the partnership interest on the date of the distribution.

If partnership PROPERTY (other than marketable securities treated as money) is distributed to a partner, he or she generally DOESN”T RECOGNIZE ANY GAIN UNTIL the sale or other disposition of the property.

63
Q

When does a Partner recognize GAIN on a partnership distribution?

A

A partner generally recognizes gain on a partnership distribution only to the extent any money (and marketable securities treated as money) included in the distribution exceeds the adjusted basis of the partner’s interest in the partnership.

64
Q

What is the earliest date that a business can be treated as a corporation without regard to the election relief rules, if they file Form 8832 by March 15 of any given year.

A

The earliest date is: January 1 of the year the Form 8832 is filed.

This is so because, an eligible entity may elect an alternative treatment no more than two months and 15 days after the beginning of the tax year the election is to take effect, or anytime in the preceding tax year.

ISEA-2019-BUS (13 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions