Flashcards in Partnerships Deck (33):
Exempt from partnership rules if....
organized for investment purposes
association of two or more taxpayers in the business of making a profit.
Co-ownership/ Joint use of property does not necessarily constitute as a partnership. Must be active conduct of a business with the intent to share profits
Check the box
unincorporated entities may elect to be taxed as a corporation or partnership/
Default entity is a partnerhsip when the biz has 2 or more owners.
election under check-the-box regs is effective if filed within 75 days of the tax year.
can participate in mgmt and have joint and several liability of partnership's debts. All partnerships must have at least one general partner.
Partnership loss can be passive if they do not participate materially in the partnership.
only liable up to their investment but cannot participate in management without losing limited status.
Partnership loss will be a PASSIVE loss to a limited partner bc they are not actively participating in management.
Each partner owns a capital interest and a profits interest.
capital sharing ration represents each partner's share of partnership capital
P&L ratios represent the partner's share of profits and losses
formation of partnership does not trigger incmoe but requires both partners and partnership to calculate adjusted basis
Contributions are not a taxable event but require partners to calculate a substituted basis for their partnership interest
Deferred g/l- recognize no G/L on contributions in exchange for partnership interest
Control Club- 80% rule does not apply to partnerships
Used for corporate contributions and is not relevant for partnerships bc they are taxed as conduits.
No distinction is made between an initial contribution and later additional contributions
No deferral is available for contributions in exchange for property. deferral is only available when the partner receives an interest in the partnership
Exceptions for nonrecognition
Services contributed to a partnership for interest create income for the FMV of interest received for services
There is no deferral for contributions that are essentially disguisned sales or attempts to diversify stock holdings.
Basis at formation
Partnership- Taxes carryover basis (adj. basis in the property ) for contributed property from partner. holding period and depreciation methods also continue and are carried over.
Partner- Take substituted basis in the partnership interest from assets contributed to the partnership.
holding period in a partnership interest includes the holding period of contributed asset for contributions of cap assets and 1231 assets.
Holding period partner had in contributed property always transfers over to the partnership.
Computation of Basis
Increases- Contributions of property/income/increase in liabilities
Decreases- distributions/expenses/losses and paid off liabilities.
If debt assumed is greater than the assets contributed a gain must be recognized to prevent a negative basis.
REMEMBER TO ADD BACK LIABILITY SHARE FOR THE PARTNER
Recourse Debt- each partner's share of debt is measured by the economic risk of loss assuming constructive liquidation scenario occured. limited partners are not allocated RECOURSE DEBT
Non recourse- both general and limited partners are allocated this debt.
represents the amount a partner should receive when partnership is liquidated
Basis and capital accounts are computed in similar fashion except:
Liabilities of partnership do not affect the capital account
FMV of contributions and distributions impact capital account rather than the tax basis.
partners report income in the year that the partnership tax year ends
partners reportincome once the partnership closes it's books and the partnership YEs
Required tax year-
Partnership use the same YE as majority intereset partners (more than 50%)
-if no single year than use YE of all prinicipal partners more than 5%
- use the least aggregate deferral method.
DUE ON THE 4th month following YE APRIL 15
five month extension.
Allocation of income
receive share according to partnership agreement
- separately stated items are distributed in same proportion as P&L unless substantial econmic effect test is met.
Separately stated items
Tax exempt interest
section 179 expense
Qualified dividends (taxed at max of 20%)
SECTION 1245 recap is NEVER sep stated.
Items not affecting income
General Partner's distribtuions
subject to SE tax but limited partners are not.
GUARANTEED payments for both partners are subject to SE tax
Parnters cannot deduct losses below their basis
Partners cannot deduct losses past at-risk amount
if passive- only deduct loss to extent of passive income.
made to partners without regard to partnership income, like a salary:
1. ordinary income to recipients at YE
2. reduce partnership income and thereby reduce partner's distributive share of such income
3. deemed paid to partner on lasst day of partnership's tax year.
allocated back to original contributing partner when property is sold from partnership.
partnerships do not recognize g/l on distributions
a. partners can recog. gains on nonliquidating or liquidating distributions of cash. Cash distributed in excess of basis is gain
b. non liquidating distributions of property NEVER trigger loss recognition but losses may be recognized on liquidating distributions.
Non Liquidating Distributions
distribution to a continuing partner including a draw by the partner.
arms length sales to partners are not distributions
Basis effects- return of capital that reduces outside basis
1. cash and reduction of liabilities
2. unrealized recievables/inventory
3. other assets at FMV
may result in a G/L and requires partner to transfer their outside basis to assets received from partnership.
1. occurs when entire partnership is liquidated
- partnership itsself doesen't recog. any g/l
Liquidating distributions- loss
1. distribution must consist of ONLY cash, inventory and unrealized receivables
2. outside basis of partner's interest exceeds sum of cash plus inside basis of receivables and inventory.
reduction in liabilites- treated as cash distributions and always done before assets/inventory
distributions of these are treated as deemed distributions up the the value of the securities less partner's share of appreciation inherent in the securities
Built in gain property to other partners besides to the partner who originially contributed
within seven years of original contribution causes gain recognition.
Distribution of hot assets
triggers income recognition
FMV>120% X adj. basis
Sales of partnership interests
results in a g/l calculated in manner used for other assets, using outside basis to compute the g/l