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Flashcards in Partnership Taxation Deck (32)
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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.
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.
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.
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.
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.
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.
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.
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)
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
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.
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.
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)
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.
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
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
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.