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Flashcards in Taxes: Formation & Basis Deck (9)
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1

Taxes:
Partnership - Formation & Basis

Partnership - Formation & Basis
- a partnership is not a taxable entity (partners report regardless of distributions)
- may be exempt from partnership rules if formed for investment purpose
- partnership: association of 2+ individuals to make profit

2

Taxes:
Partnership - Formation & Basis
"Check the Box" Regulations

"Check the Box" Regulations
- unassociated entities may elect to be taxed as a corp or a partnership
- "per se" corporations must be taxed as corp
- default rule is partnership if 2+ owners
- only effective if filed in first 75 days of year

3

Taxes:
Partnership - Formation & Basis
General/Limited Partners

General/Limited Partners
- partnership loss is passive to limited partner
- partnership loss may be passive to GP depending on material participation test (rental is most likely passive)
- owners of LLC are "members"

4

Taxes:
Partnership - Formation & Basis
Formations

Formations
- formation of partnership does not trigger income
- contributions are not taxable but must calculate basis
Deferred gain/loss: when contributions are to receive partnership interest (must have 80% control)
- no distinction between initial and later contributions
- do deferral if contribution in exchange for property
Exceptions for Non-Recognition
- service contributions create income and equals basis of ownership in interest-
- no deferal for disguised sales

5

Taxes:
Partnership - Formation & Basis
Basis

Basis
- each partner calculates their adj basis (outside basis)
- partnership calculates adj basis of assets (inside basis)
- partnership takes carryover basis for contributed property
- partners take substitutes basis from assets contributed

6

Taxes:
Partnership - Formation & Basis
Holding Period

Holding Period
- holding period of partnership interest includes holding period of assets for capital assets and section 1231. All others starts when assets contributed.
- partner's holding period always goes to partnership
- adj basis for services is value included in income

7

Taxes:
Partnership - Formation & Basis
Computation of Basis of Partnership Interests

Computation of Basis of Partnership Interests
Partnership Interest
+ increased by contributions of property, income, and increases in liabilities
- decreased by distributions, expenses, and deemed distributions, and decreases in liabilities
*** partnership interest cannot be negative, must recognize a gain***
- limited partners are not allocated any share of recourse debt, but nonrecourse debt is allocated by partnership interest

8

Taxes:
Partnership - Formation & Basis
Capital Account

Capital Account
- amount partner should receive upon liquidation
- difference from basis:
- liabilities do not affect capital account
- FMV of contributions and distributions impact the capital account rather than the tax basis

9

Taxes:
Partnership - Formation & Basis
Permitted Tax Years

Permitted Tax Years
- partners only report income once partnership closes its books
Rules
- use same year-end as majority interest partner(s) 50%+
- if no majoirity, same year-end as all principle partners 5% P&L or more
- if neither then: least aggregate deferral
- can elect fiscal year-end or natural year end if business purpose
- Natural Year End: 25%+ of gross receipts occur in last 2 months of year

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