True or False? Partnerships are a taxable entity.
False. Income and expenses flow through to the partner to be taxed via a Form K-1.
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When exchanging property for a partnership interest, how is gain or loss recognized?
Neither gain nor loss is recognized in an exchange of property for a partnership interest. It is a non-taxable event.
What is a partner’s basis in partnership property?
The initial basis for partnership property is the basis of the property that was contributed or exchanged for the partnership interest.
When services are exchanged for a partnership interest; How is this treated for tax purposes?
It is a taxable event.
It is treated the same as compensation for the services.
The taxable income equals the % of partnership interest received times the FMV of the partnership. i.e. the FMV of the interest received is the taxable income for the service provider.
What is the partner’s basis in a partnership when they provide a service in exchange for the interest?
The basis in the partnership interest is the amount of taxable service revenue provided by the service provider.
What is the holding period of an asset that has been contributed to a partnership?
The partnership inherits the holding period of the asset contributed.
The exception of inventory - the holding period begins when contributed.
What is the tax treatment of startup costs for a partnership?
Tax treatment is the same as that of an individual taxpayer. However, syndication fees are not deductible or amortized.
What deductions are subtracted from gross revenues to arrive at partnership income?
- COGS
- Wages - except for partners
- Guaranteed payments to partners
- Business bad debt (if on an accrual basis)
- Interest paid
- Depreciation (except section 179)
- Amortization (Startup costs, goodwill, etc)
How are partnership losses taken on an individual’s return?
Losses cannot be taken beyond a partner’s basis in the partnership.
Losses in excess of basis are carried forward until more basis is available.
When are guaranteed payments to a partner includable in taxable income?
They appear in partner’s income during the year in which the partnership’s fiscal year closes.
How are partner benefits paid by the partnership treated?
Health insurance, life insurance and other benefits paid on behalf of the partner are treated as guaranteed payments and are includable as self-employment income.
How is net self-employment income from a partnership interest calculated?
Partner’s % share of ordinary income from partner’s K-1
+ Guaranteed payments
- Partner’s % share of section 179 expense from K-1
= Self-employment income (subject to SE tax)
In general, what is a partner’s basis in partnership property purchased?
Partner’s basis is the basis of goods exchanged or for services exchanged is FMV of partnership interest received.
If purchased, purchase price less liabilities incurred = basis.
For a gifted interest in a partnership, gift basis rules apply.
Which items are not deductible on Schedule K of form 1065?
Mnemonic: IFC179
- Foreign tax paid
- Investment interest expense
- Section 179 expense
- Charitable contributions
Which items are not counted as income on Schedule K of form 1065?
Mnemonic: PP1231
- Passive Income
- Portfolio Income
- 1231 Gain or Loss
How is adjusted partnership basis calculated?
Beginning partnership basis
+ Capital contributions
+ Share of ordinary partnership income
+ Capital gains
+ Tax-exempt partnership income (DON’T FORGET!)
= Ending partnership basis
What items DECREASE partnership basis?
Partnership basis is decreased by:
- Money distributed
- Adjusted basis of property distributed
- Partner’s share of ordinary losses
- When the partnership is relieved of a liability (considered a distribution)
What INCREASES partnership basis?
Partnership basis is increased by:
- Partnership getting a loan
- Capital contributions
- Ordinary income
- Capital gains
- Tax-exempt income
How do liabilities either INCURRED or RELIEVED affect a partner’s basis in a partnership?
If the partnership gets a loan, this increases basis.
If a partnership is relieved of a liability, this decreases basis.
How do guaranteed payments directly affect partnership basis?
They do not directly affect basis; they are already included in ordinary income, which affects basis.
What is the order in which basis is adjusted in a partnership?
- Increase basis (all items including tax-exempt income)
- Distributions
- Losses (limited to basis)
How is the taxable year of a partnership determined?
It must be the same as 50% of the partners and use the same tax year for 3 years once adopted.
How does the death of a partner affect the partnership’s taxable year?
The taxable year only closes with respect to the partner and their partnership interest.
What is the revenue threshold for a partnership using cash basis accounting?
A partnership can use cash basis accounting if revenues are less than $25MM (3-Year Avg).
When does a partnership terminate?
A partnership is terminated when:
- There are less than 2 partners (only one partner)
- Operation Ceases
How is gain or loss on sale of a partnership interest calculated?
Amount realized on the sale
- Basis in p__artnership interest
= Gain or Loss
What is the new basis of a partnership interest sold?
Basis = Capital account + Liabilities assumed
How is the sale of non-capital partnership property treated?
They are treated as an ordinary gain/loss.
Items that fall into the non-capital category would be unrealized receivables, appreciated inventory, and similar.
How is a partner’s share of an ordinary gain calculated?
FMV of Assets (non-capital)
- Adjusted basis of assets
= Ordinary gain
x Partner’s % interest
= Partner’s share of gain
Note: No gain or loss will be recognized by a partnership upon distribution of property.
What is the order of basis reductions for distributions from a partnership?
- Money distributed
- Adjusted basis of unrealized receivables and inventory
- Adjusted basis of other property
Note: Only MONEY distributions will trigger a gain in a partnership distribution.
When can a loss occur in a partnership distribution?
Only in a liquidating distribution.
What are the requirements for recognizing a gain in a partnership liquidating distribution?
- Money was distributed
- Unrealized receivables were distributed
- Appreciated inventories were distributed
Otherwise, no loss recognized.
When is a Partnership Return due for a calendar year-end partnership?
3/15 with a six-month extension available
