Federal Taxation X: Partnership Tax Flashcards Preview

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Flashcards in Federal Taxation X: Partnership Tax Deck (26):


An association of two or more taxpayers to operate a business that is not taxed as a corporation

Income is taxed to owners regardless of distributions

Distributions are treated as return of capital


Check-The-Box Regulations

Unincorporated entities may elect to be taxed as an association (corporation) or partnership


General Partner

can participate in management and have joint and several liability for the partnership's debts.

all partnerships must have at least one general partner


Limited partners

only liable up to their investment, but cannot participate in management w/o losing limited status


Partner Interests

Capital Interest
Profits Interest


Partnership Basis at Formation

Inside Basis of property refers to aggregate basis of assets in hands of the partnership

Partnership takes carryover basis for contributed property as well as holding periods and depreciation methods


Partner Basis at Formation

Outside Basis refers to adjusted basis of each partners' interest

A substituted basis in the partnership interest from the assets contributed


Holding Period in Partnership interest

1. includes holding period of contributed asset for contributions of capital assets/section 1231 assets
2. holding period partner has in the asset before contributed always transfers to the partnership
3. adjusted basis for contributions of services is the value included in the income of the partner
4. adjusted basis for partnership interests purchased from existing partners or interests received as gifts/inheritances are determined like other assets


Partnership Calculation of outside basis

Initial Basis

+ Additional Contributions
Partner's share of:
Debt Increases
Partnership Income
Exempt Income

- Distributions:
Cash Distributions
Debt Decreases
Asset Distributions
Partner's share of:
Nondeductible Expenses
Partnership Loss


Natural Business Year

A year in which 25% or more of gross receipts occur in the last two months of the year (3 consecutive years)


Partnership Allocations

partners receive a share of income or share of loss, according to the partnership agreement


Measuring and Reporting Partnership Income

1. All items of income (gain, deduction, loss, or credit) that are required to be separately stated or that are specially allocated are removed from the partnership's ordinary income/loss determination.

Each partner's portion of these items is reported on K-1

2. Remaining items are lumped together to produce next ordinary income/loss (proportionately reported to each partner)


Partnership Separately Stated Items

any tax items that might affect partners differently, such as:

dividends, capital gains/losses, tax-exempt interest, passive losses, charitable contributions, investment income, section 179 expenses


Partnership Loss Limitations - can only deduct losses if

1. Partners must have enough basis
2. Can deduct losses only to extent of at-risk amount (partner basis less partner share of nonrecourse debt)
3. If loss is passive, can only deduct to extent of passive income


Partnership Guaranteed Payments

made to partners without regard to partnership income


Partnership Precontribution (Built-In) Gains/Losses

Allocated back to original contributing partners when property is sold... up to the gain/loss realized on the sale.


Partnership Built-in gain/loss property

Property that has appreciated (declined) in value at the time of it's contribution to the partnership... Value of gain property is > adjusted basis... Value of loss property is


Partnership Nonliquidating (Current) Distributions

A distribution to a continuing partner, including a draw by the partner

Return of capital that reduces outside basis in a specific order


Nonliquidating Distribution Basis Effects

1. partner's adj basis is allocated to cash distributions and cash deemed distributed (reduction in liabilities)

2. partner's adj basis is allocated to dist. of unrealized receivable and inventory in an amount equal to partnership's basis in these assets

3. partner's adj basis is allocated to other assets distributed

4. distributed property retains inside basis (in hands of partner) unless partner runs out of outside basis, then the inside basis is reduced to outside basis of the property


Partnership Liquidating Distributions

may result in gain/loss, and requires partner to transfer his or her outside basis to assets received from partnership


Liquidating Distribution Basis Effects

treated as return of capital and partner's outside basis is substituted for inside basis of distributed property

1. distributions of cash/deemed distributions trigger gain tot eh extent cash exceeds outside basis

2. distributed property retains inside basis, but amount is adjusted up/down depending on the outside basis of the partner

3. inventory and receivables must be distributed pro rata


Liquidating Distribution Loss Recognition

1. distribution must consist of only cash, inventory, unrealized receivables

2. outside basis of partner's interest exceeds sum of cash plus inside basis of receivables/inventory


Partnership Hot Assets

generate ordinary income/loss because partner has not yet been taxed on accrued, but unrealized, income

inventory/unrealized receivable


Partnership Disproportionate Distributions

Occur when ordinary income assets (inventory and receivables) are distributed to partners without regard to their proportionate ownership interests


Sale of Partnership Interest

Results in gain/loss calculated using outside basis to compute gain/loss.

Hot assets not eligible for capital gain treatment, must recognize ordinary income.


Termination of Partnership

1. Requires closing of partnership tax-year
2. Results in deemed distribution of assets to the partners