Partnership Taxation Flashcards
Form 1065
Due March 15 - but no taxes are due when files - PARTNERSHIPS DON’T PAY TAX
Partners pay tax on their personal 1040
Partners are not employees - only way that profits would be deductible UNLESS it’s guaranteed - owner will take it as ordinary income
Distributions do not show up in ordinary income or on the company deduction - distribution is tax free
- Partners still pay tax on the business profit of the partnership
- Distributions go onto Schedule K & K-1
Separately Stated Items
- Section 179 depreciation
- charitable contributions
- dividend revenue
Schedule K & K-1
Linked together by line item
Schedule K - Partners Distributive Share Items: Summarize the different income, deductions and credits from 1065 to 1040
Schedule K-1 - for each individual partner
Charitable contribution - pass through to the partners for their 1040
Section 179 deduction - allows you to deduct immediately depreciation - separately stated item - allows you recuperate cost for asset for business in the first year
Partnership Basis
Losses can be deducted on personal 1040 but only up to the amount the partner has at risk (basis)
Increases
- investments
- all income earned (taxable or not)
- loans made to partnership from partner increase only
- ownership % of debts (Partnership only-not Scorp)
Decreases
- withdrawals
- distributions
- losses
- repayment of loans to partner or bank
Why keep track?
- for selling part of partnership
- for potential losses in future years (distribution and any income first then balance is limit)
If you take a loss - anything over basis its suspended until next year you have a positive basis
Property - goes into partnership as basis - not FMV - gain or loss to partner or partnership
- with mortgage: deduct from property basis and add in half the mortgage to basis
If partner has negative basis at initial interest - they need to recognize a gain to get back to 0
Perform Services for partnership interest - recognize ordinary income for FMV received (if known) or the cost of service and that is added to basis
- if other assets - take basis of assets first and calculate FMV of assets and balance is FMV of services to be included with Basis of other assets
Legal services contributed - must wait 3 years for LTCG
Normal or Current Distributions
- no possibility of loss
- gain is if cash is more than basis
- asset is valued at basis it went in or valuation of the basis if basis is more than recorded basis
- remaining basis stays in partnership
Liquidating Partnerships
The partner removes the entire investment in the partnership
- cash distributed to partner is always recorded first
- partnership is not taxed
CASH - gain: the partner if cash exceeds basis
- loss: long term capital loss if more than 1 year
OTHER ASSETS - no gain or loss
- asset valued at the difference between cash and basis
- if cash is more, the asset has zero basis
Sale of Partnership Interest
Capital Gain or Loss = amt realized for the sale - adjusted basis of the interest
Hot Assets: unrealized receivables and appreciated inventory (would provide ordinary income for the partnership)
- none - capital gain or loss
- yes - ordinary income and capital gain
— amount for the sale - basis = total gain - hot assets (ordinary income) = capital gain
Hot Asset
-unrealized receivables
- appreciated inventory
these would provide ordinary income for the partnership
Termination
Considered terminated for tax purposes - when it ceases to operate as a partnership: discontinues operations for 12 months OR only has 1 owner
Contributed Services - Sale of Interest
Interest exchanged for legal services - lawyer must wait 3 years for capital gain
Assets Contributed with Built In Gain
No gain is taxed to the partner at date the asset is contributed (comes in as basis)
If partnership sells asset - partner that contributed is taxed on built in gain
- if asset is sold for more than the original built in gain: built in gain goes to original partner, then remaining gain is split within the partnership based on allocation
