Partnership Taxation

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Partnership Taxation
2011-05-10 13:23:02

Becker CPA Review: Regulation
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  1. Basis of Contributing Partner's Interest in a partnership
    • Cash
    • Property @ NBV
    • -Liabilties put in
    • Services @ FMV
    • Liabilities taken on
    • =Initial Basis
  2. holding period of asset contributed to partnership
    1231 asset: holding period includes the holding period of the partner's

    oridinary income asset: holding period begins on the date the property is contributed to the partnership.
  3. partner basis formula
    • beginning capital account
    • cash
    • FMV services
    • NBV assets
    • - liability
    • + % of income
    • ordinary
    • capital
    • tax-free
    • - % of losses
    • a partner may take a partnership loss as a tax deduction up to his/her basis
    • - withdrawals

    • = Ending captial account
    • + % recourse liabilities
    • = Year-end basis
  4. Partnership tax year
    Calendar year: due Apr 15


    Fiscal year: three month deferral (oct, nov, dec) is the max permitted
  5. when does a partnership terminate
    • operations cease
    • 50% or more of the toal partnership interest in both capital and proftis is sold or exchanged within any 12-month period
    • there are less than two partners
  6. Related Party Loss
    losses (directly or indirectly) between a controlling partner (over 50% interest in capital or profits) and his controlled partnership from the sale or exchange of property are not allowed.
  7. When is a partner's income taxable?
    When it is earned, even if it is not withdrawn
  8. Discuss tax losses of partner
    • deduction is limtied to the partner's adjusted basis in the partnership
    • any unused loss can be carried forward and used in a future year when basis becomes available
  9. guaranteed payments
    reasonable compensation paid to a partner for services rendered or use of capital without regard to his ratio of income.
  10. how are guaranteed payments treated?
    • allowable tax deduction to the partnership (salary or interest expense depending on services vs use of capital, and
    • income to the partner
  11. how are payments received by a retired partner treated, not in liquidation?
    • recipient: oridinary income
    • partnership: deduction
  12. organizational expenditures and start-up costs
    • $5,000 max deduction, reduced after amount exceeds $50,000.
    • Any excess is amortized over 180 months; starting in the month business begins.
    • included costs:
    • fees paid for legal services in drafting the partnership agreement
    • fees paid for accounting services
    • and fees paid for partnership filings
  13. syndication costs
    costs of raising money - non-deductible
  14. How are partnership losses treated for each tax payer?
    • generally: treated as an adjustment to partners' basis
    • excess: loss>basis = excess is carryforward indefinitely and remais suspended until basis is re-established.
  15. three ways a partner may liquidate his partnership interest
    • 1. complete withdrawal
    • 2. sale of partnership interest, and
    • 3. retirement or death
  16. Nontaxable liquidation equation
    • Beg. Capital Account
    • % Income (loss) up to withdrawal
    • = partner's capital account
    • % of liabilities
    • =adjusted basis @ date of withdrawal
    • - cash withdrawn

    =remaining basis to be allocated to assets withdrawn
  17. When does a partner gain recognize a gain in a liquidation?
    A partner recognizes a gain only to the extent that money received exceeds the partner's basis in the partnership.
  18. When does a partner recognize a loss in a liquidation?
    The partner recognizes loss if only money, unrealized receivables, or inventory are received and the basis of the assets received is less that his adjusted basis in the partnership.
  19. Basis used and Stopping Point of:
    1. nonliquidating withdrawal
    2. liquidating withdrawal
    • 1. Nonliquidating Withdrawal:
    • Basis: NBV Asset Taken
    • Stopping Point: Stop at zero

    • 2. Liquidating Withdrawal:
    • Basis: Partnership Interest
    • Stopping Point: Must "zero-out" account
  20. Sale of Partnership General Rule
    • The partner has a captial gain or loss when transferring a partnership interest because a partnership interest is a capital account.
    • Capital Gain (Loss) Measured: difference between the amount realized for the sale and the adjusted basis of the partnership interest.
  21. Capital Gain or Loss Calculation in Sale of Partnership Interest (liquidation)
    • beginning capital account
    • % income (loss) up to sale
    • = capital account @ sale date
    • % of liabilities
    • = adjusted basis
    • - amount received: cash, COD, FMV property

    = Capital Gain (Loss)
  22. Sale of Partnership Exception to General Rule
    Any gain that represents partner's share of "hot assets" is treated as "ordinary income" as if cash were taken.
  23. Hot Assets
    • unrealized receivables (as if exchanged for cash)
    • appreciated inventory (as if exchanged for cash)
  24. Payments in regards to the Retirement or Death of a Partner
    Payments to a retiring partner or to the interest successor of a deceased partner in liquidation of his entire partnership interest are allocated between payment for an interest in partnership assets an other payments.
  25. Payments for a partnership interest in regards to the retirement or death of a partner
    payments for the interest in partnership assets result in capital gain or loss
  26. Other Payments in regards to the retirement or death of a partner
    • If the payments are measured by partnership income, they are treated as partnership income regardless of the period over which they are paid.
    • Thus, such payments are taxable as ordinary income to the retired partner as if he or she continued to be a partner.
  27. Proration or Partnership Income and Losses
    example: Partner A (20% partner) sells to Partner B on Mar. 31. Proration?
    Where a partner sells his or her interest to a new partner in the middle of the tax year, the selling partner's share of partnership income or losses must be allocated pro-rata (based on the date of sale) between the selling partner and purchasing partner.

    Example: Sale date 1/4 of the year. Partner A will report 5% (20% * 0.25) of partnership's annual income or losses. Partner B reports 15% of partnership's annual income or losses.