Partnerships

Question 1

What are the basics of partnerships?

Answer 1

Partnerships are not a legal (taxable) entity

Income and Expenses flow through to the Partner via a Form K-1

Question 2

Is property for partnership interest exchange a taxable event?

Answer 2

No, not taxable. No gain or loss recognized

Question 3

What is the partner’s basis?

Answer 3

Basis of property contributed

Exception: When property has a liability that exceeds basis Capital Gain

Ex. $4,000 basis with a $6,000 mortgage for a
20% interest
$4,000
 ($6,000 x 80%)
$800 Capital Gain

Question 4

Are services for partnership interest a taxable event?

Answer 4

Yes, treated the same as compensation

Question 5

Formula for services for partnership interest exchange

Answer 5

% of partnership interest
x FMV of partnership
= Taxable Income

Question 6

What becomes the partnership basis for services for partnership interest?

Answer 6

Taxable income

Question 7

What is the partnership-holding period of an asset?

Answer 7

Inherits holding period of asset contributed

Question 8

What is the exception to the partnership holding period of an asset?

Answer 8

Inventory - holding period begins when contributed

Question 9

What is the tax treatment for startup costs for a partnership?

Answer 9

same as that of an individual taxpayer

Question 10

Are partnership startup syndication fees (preparing offering materials) deductible and/or amortizable?

Answer 10

No

Question 11

What are the deductions to arrive at partnership income?

Answer 11

(Except for partners)

(Accrual basis only)
(payments to partners are OK)
(except 179)

= Partnership Income

Question 12

How is partnership losses treated?

Answer 12

1. Cannot be taken below basis
2. Loss is carried forward until basis is available

Example:
$2,400 Beginning Basis:
$200 Plus Income:
 Minus Ordinary Loss: 
$0
$400 Loss gets carried forward until basis is available

Question 13

When do guaranteed payments appear in partner’s income?

Answer 13

During year in which FY closes

Ex 6/1/14-5/31/15 Fiscal Year; even if payment was received in 2014, it is income on the 2015 individual return

Question 14

What are partnership benefits?

Answer 14

Health Insurance
Life Insurance
Treated as guaranteed payments and are SE income

Question 15

Formula for SE income subject to SE tax

Answer 15

% Share of Ordinary Partnership Income (Loss) from K1

+ Guaranteed Payments

Question 16

What is the partner’s basis from property contribution?

Answer 16

Property’s original basis

Question 17

What is the partner’s basis from compensation for services?

Answer 17

FMV of % of partnership ownership

Question 18

What is the partner’s basis from purchase of partnership interest?

Answer 18

Amount of purchase

Question 19

What is the partner’s basis from partnership interest by gift?

Answer 19

Gift Basis rules apply

Question 20

What are items not deductible on Schedule K, and flow to partner’s K-1?

Answer 20

o Investment Interest Expense
o Foreign Tax Paid
o Charitable Contributions
o 179 Expense
Mnemonic: IFC179

Question 21

What are items not counted as income on Schedule K?

Answer 21

Passive Income
Portfolio Income
1231 G/L
Mnemonic: PP1231

Question 22

PARTNERSHIP BASIS CALCULATION

Answer 22

Beginning Partnership Basis
\+Capital Contributions
\+Share of Ordinary Income
\+Capital Gains
\+Tax-Exempt Income (don't forget this)
=Ending Partnership Basis

Question 23

What is the partnership basis decreased by?

Answer 23

Money Distributed
Adjusted Basis of Property Distributed
Share of Ordinary Losses
Partnership is relieved of a liability (considered a distribution)

Question 24

What is the partnership basis increased by?

Answer 24

Partnership getting a loan

Question 25

What is the order of adjustment to basis?

Answer 25

Increase basis in share of liabilities
Increase basis from all income items - including tax-exempt income
Decrease basis for distribution
Decrease basis for losses (limited to basis)
Gains are always allowed in related-party transactions
o 33% partner sells property to a partnership at a
$6,000 gain
o Partner recognizes a $6,000 capital gain on K-1

Question 26

How will a 50% or more partner who contributes capital gain property to partnership, who in return won’t use it as capital gain property?

Answer 26

treats the gain as ordinary and so will the partnership

Question 27

What is the partnership taxable year?

Answer 27

Must be the same as 50% of partners and use the same tax year for 3 years

Question 28

What is the tax effect of the death of a partner?

Answer 28

Taxable year only closes with respect to partner and their partnership interest

Question 29

When can a partnership NOT use cash basis?

Answer 29

Partnership has inventories
Partnership is a tax shelter
Corporation is a partner
Gross receipts of $5 Million or more (even though they carry no inventory)
Gross receipts of $1 Million or less AND maintains inventory is OK for Cash Method

Question 30

When does a partnership terminate?

Answer 30

1. When less than two partners

2. When 50% of partnership interest sells within 12 month period - terminates IMMEDIATELY

Question 31

What happens from the sale of partnership interest?

Answer 31

Results in a Capital Gain/(Loss)
Amount Realized – Basis in Partnership = Gain/(Loss)
Basis = Capital Account + Liabilities Assumed
Any assets sold that are not capital in = Ordinary Gain
o Unrealized Receivables
o Appreciated inventory

Question 32

Formula for partner’s share of ordinary gain

Answer 32

FMV of Assets (non-capital)

=Ordinary Gain
x Partnership Interest %
= Partner’s share of ordinary gain
Note: Partnerships recognize NO G/L on a Distribution

Question 33

What is the DISTRIBUTION: ORDER OF BASIS REDUCTION?

Answer 33

1. Money received
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

Question 34

When can a loss occur for a partnership?

Answer 34

In a liquidating distribution

Question 35

What are the requirements for a loss to be recognized in a partnership?

Answer 35

1. Money was received
2. Unrealized receivables received
3. Appreciated inventories received
   Otherwise, no loss