R3 Module 6

Question 1

partnership characteristics

Answer 1

-income is taxed only once when it flows through to partner
-individual partners (not partnership) pay tax on partnership income
-general partnerships, limited partnerships and LLCs and other unincorporated businesses treated as partnership under Subchapter K rules of IRC
-all members have right to amend LLC operating agreement, provide input, and manage LLC
-can distribute appreciated property tax-free to an owner versus an S corp

Question 2

Partnership Tax return

Answer 2

-must file a Form 1065 tax return
-Form 1065 provides info about:
1) partnership income and expenses
2) each partner’s distributive share of ordinary business income (loss)
3) separately stated income, gain, loss and deductions
-each partner liable only for taxes due on his distributive share of partnership income on Schedule K-1 regardless if distribution made to partner

Question 3

Pass-Through of Income or Loss (to Partner/K-1)

Answer 3

-partner must include an individual income tax return partner’s distributive share of ordinary business income or loss and separately stated items

Question 4

Items that appear on Form 1065

Answer 4

1) Business income
2) (Business Expenses)
3) (Guaranteed payments)
4) = Ordinary business income or loss
5) Guaranteed payments to partners
6) Partner’s health insurance premiums (included as part of guaranteed payments)
7) Retirement plan contributions for employees
8) U.S. Treasury interest
Note: do NOT include tax basis in calculation for gross income

Question 5

Items that appear on Schedule K/K-1

Answer 5

1) ordinary business income or loss
2) guaranteed payments to partners
3) Net rental real estate income or loss
4) Interest income
5) Dividend income
6) Capital gains and losses
7) Net Section 1231 gain (loss)
8) charitable contributions
9) Section 179 expense deduction
10) Investment interest expense
11) Partner’s health insurance premiums (included as part of guaranteed payments)
12) retirement plan contributions for employees and partners
13) Tax credits (reported by partnership but claimed by partners)

Question 6

Guaranteed Payments

Answer 6

-reasonable compensation paid to a partner for services provided or use of capital without regard to partner’s profit or loss sharing ratio
-allowable tax deductions to partnership and taxable income to partner

Question 7

Partnership guaranteed payment tax deduction

Answer 7

-allowable tax deductions to partnership for services (guaranteed salary) or for use of capital (guaranteed interest) without regard to partnership income or profit and loss-sharing ratios (includes FMV of capital partnership interest issued in exchange for services contributed)

Question 8

Partner guaranteed payment taxable income

Answer 8

-included on Schedule K-1 to be included as ordinary income to partner (can be included as part of net earnings from self-employment)
-guaranteed payments for services not included in QBI for purposes of Section 199A QBI deduction for flow-through business entities

Question 9

Partnership ordinary business income or loss calculation

Answer 9

Gross business income - salary expense - guaranteed payments to partners - other expenses incurred for business - depreciation expense

Question 10

Allowable organization expenditures

Answer 10

-fees paid for legal services in drafting partnership agreement
-fees paid for accounting services
-fees paid for partnership filings
-start-up costs include training costs
-advertising costs
-testing costs prior to opening of business

Question 11

Nondeductible costs

Answer 11

syndication costs (offering materials) not deductible

Question 12

Partner’s Tax Basis in Partnership Interest

Answer 12

-includes partner’s capital account + partner’s share of partnership debt
-partner’s share of partnership debt includes debt for recourse debt and nonrecourse debt
-Increases to basis: additional contributions, income and gain items, increase in partnership debt
-Decreases to basis: distributions, loss and deduction items, and decreases to partnership debt

Question 13

recourse debt vs nonrecourse debt

Answer 13

-debt which partner has personal liability
-debt which is secured by property and increases partner’s basis by proportion of ownership

Question 14

Tax Basis limitation

Answer 14

-loss only be flowed through to partner’s individual income tax return to extent of partner’s tax basis in his or her partnership interest
-loss in excess of partner’s tax basis in partnership interest suspended until basis reinstated in future yrs
-basis reinstated by noted increase items
-partner’s share of partnership debt included in basis depends on type of partner and type debt

Question 15

Suspended losses treatment

Answer 15

-suspended loss due to insufficient tax basis can be carried forward indefinitely
-any suspended losses due to insufficient tax basis remaining when partner disposes of his or her partnership interest are lost

Question 16

Tax classification of LLCs

Answer 16

-LLCs are separate legal entities from its owners
-not personally liable for obligations of business
-All members have limited liability
-treated as a partnership, corporation, or sole proprietorship
-if have at least two owners taxed as a partnership unless an election made to have LLC taxed as C corp; election made on Form 8832
-if single member LLC; its a disregarded entity for fed income tax purposes and treated as sole proprietorship if owner an individual and included in corp’s TI if owner is C corp.

Question 17

Cash distributions treatment

Answer 17

-adjusted gross income does not include cash distributions if distributions do not exceed partner’s tax basis in partnership interest prior to distribution
-cash distributions only included on Schedule K-1 to calculate partner’s basis NOT AGI