Partnerships Pt. 1 Flashcards
A partnership interest can consist of what two types of interest?
capital interest - right to share in the net assets of the partnership when it liquidates
profits interest - a right to share in the future profits/losses of the partnership
What happens when a partner receives a profits interest in exchange for services provided?
the partner does not recognize any compensation as ordinary income because a profits interest is a right to uncertain future profits which are not measurable at the time the profits interest is received, and it has no liquidation value
What happens when a partner receives a capital interest in exchange for services provided?
the partner recognizes compensation at the liquidation value of the capital interest which is the amount the partner would receive should the partnership liquidate; this is included in the partner’s taxable ordinary income
How is a partner’s basis in their partnership interest calculated?
partner’s initial basis in partnership interest = cash contributed + property contributed (adjusted basis) + services provided (FMV) - liabilities transferred to partnership and assumed by other partners + partner’s share of partnership liabilities
What are the two types of debts?
recourse debt: debts for which a partner has personal liability
nonrecourse debt: debt secured by the property
the type of debt determines how debt is allocated to partners
What happens when property is contributed to a partnership and there is excess liability?
a partner’s basis can never be negative, so the excess liability is treated as a taxable recognized gain to increase the partner’s basis to zero
How is the holding period of partnership interest determined?
if the property contributed was a capital or Section 1231 asset, the holding period of the partnership interest includes the holding period of the property contributed
if the property contributed was an ordinary income asset (inventory), then the holding period begins on the date the property was contributed
What increases/decreases a partner’s basis?
increase: income/gain items, increases in partnership debt, and additional contributions
decrease: loss and deduction items, decreases in partnership debt, and distributions
How are built-in gains/losses treated in a partnership?
once the property is sold, the built-in gain/loss is first allocated to the contributing partner to the extent of what the FMV was higher/lower on the date of contribution; the remaining gain/loss is then allocated among all partners
How is the partnership’s basis determined in the contributed property from partners?
the partnership’s basis is the contributor’s basis (carryover basis); the partnership’s holding period for the property includes the time held by the partner regardless of the character of the property contributed
What is the tax year for a partnership?
calendar year is generally required (file March 15) but if a fiscal year is chosen, it will be consistent with the tax year of the majority of partners
How are transactions between a partner and the partnership treated?
a related party loss is disallowed and a related party gain is treated as ordinary income
