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Flashcards in Partnership Tax Deck (14)
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1
Q

Formation

A

No gain or loss is recognized on a contribution of property in return for a partnership interest.

Exceptions—capital interest for services rendered = ordinary income.

Property is subject to excess liability when the decrease in the partner’s individual liability exceeds his partnership basis; the excess amount is taxable (a taxable gain similar to boot)

2
Q

Partnership

A

No gain or loss recognized. The partnership’s basis is the contributing partner’s basis in the contributed property

3
Q

Initial Basis

A

Cash (amount contributed)
+ Property [adjusted basis (NBV)] (incoming partner’s liabilities assumed by the other partners)
+ Services (FMV and taxable to partner)
+ % Liabilities (other partners’ liabilities assumed by the incoming partner)
=Initial basis in partnership interest

4
Q

Partner’s Basis Formula

A

B: Beginning capital account
A: + % all income (including tax-free)
S: (including nondeductible expenses) (property distribution reduced by NBV)
E: Ending capital account + % of recourse liabilities Year-end basis

5
Q

Partnership Tax Return

A

A partnership should be thought of as a collection of sole proprietors. Because of this, the income is taxed only once in a partnership, unlike a corporation, where it is taxed twice. Form 1065 is an information return because it is used to calculate partnership income. No tax is paid on this return. Income is shown on this return and it “flows through” to the individual tax returns of the partners via a Schedule K-1.

6
Q

Transactions Between Partner and Partnership

A

Generally, if a partner enters into a transaction with his partnership, the transaction is deemed to have occurred between the partnership and an outsider, unless the partner is a controlling partner (over a 50 percent interest in the partnership), in which case the losses are related party (WRaP) and not permitted.

Gains between a partner and the controlling partner’s controlled partnership are ordinary income if (i) the property is depreciable in the hands of the transferee (purchaser); or (ii) the property is not a capital asset in the hands of the transferee.

7
Q

Partner’s share of income, credits, and deductions.

A

A partner must include her/his/its distributive share of partnership income (even if not received) on the partner’s own income tax return. A partner’s tax loss deductions are limited by (i) the partner’s basis in the partnership; and (ii) the “at-risk” provisions. Note that losses may be subject to the passive activity loss limitation rules. Any unused loss can be carried forward to future years.

8
Q

Guaranteed payments are compensation paid to

A

to partners for services or use of capital. They are tax deductions to the partnership and income to the receiving partner.

9
Q

Organizational/Start-up Costs

A

Partnership can deduct $5,000 (each) immediately and amortize any excess over 180 months. Syndication costs are not deductible. Possible tax law update.

10
Q

Nonliquidating Distribution

A

No gain recognized unless cash distributed exceeds the partner’s basis in the partnership. Partner’s basis in the partnership is reduced by the cash or NBV or the property received. The partner’s basis in the property received will be the same as the basis in the hands of the partnership immediately prior to the distribution.

11
Q

Liquidating Distribution

A

3 ways to Terminate his/her interest:

  • Complete Withdrawal
  • Sale of Partnership Interest
  • Retirement (Death)
12
Q

Complete Withdrawal

A

The partner’s basis for the distributed property is the same as the adjusted basis of the partner’s partnership interest reduced by any cash received. Gain is recognized only if the cash received exceeds the partner’s basis in the partnership.

13
Q

Sale of Partnership Interest

A

The partner has a capital gain or loss when transferring a partnership interest. The gain or loss is measured by the difference between the amount realized for the sale and the adjusted basis of the partnership interest. If partnership liabilities are transferred to the buyer, they are considered part of the amount realized.

14
Q

Retirement (Death)

A

Payments are made for both the partner’s interest in the partnership (capital gain or loss) assets and the partner’s share of partnership income (ordinary income)