Chapter 20

What is a partnership interest, and what specific economic rights or entitlements are included with it?

-Partnership Interest: An equity in a partnership. --Created through a transfer or sale of cash, property, or services in exchange for an equity interest in a partnership. -A partnership interest gives each partner certain rights or entitlements. 1. Capital Interest - The right to receive a share of the partnership assets during liquidation. 2. Profit Interest - The right to receive a share of the future income/loss of the partnership.

How much flexibility do partnerships have in allocating partnership items to partners?

-Partnerships have a great deal of flexibility in determining how to allocate partnership items to partners, both separately stated and non-separately stated items. Determining Factors: 1. The partners agree upon the allocations -and- 2. The allocations have substantial economic effect.

Items that INCREASE a partner's basis

1. Contributions to the partner from the partnership 2. Ordinary Business Income, partner's share 3. Separately stated income/gain items, partner's share 4. Tax-exempt income, partner's share

Items that DECREASE a partner's basis

1. Distributions to the partner from the partnership 2. Ordinary Business Loss, partner's share 3. Separately stated expense/loss items, partner's share 4. Non-Deductible expenses, partner's share

How do general and limited partners treat their share of ordinary business income for self-employment tax purposes?

1. General Partners: ->Considered to be actively involved in the management of the partnership. ->General Partner's share of ordinary business income is treated as trade/business income and is subject to SE tax. 2. Limited Partners: ->Generally not actively involved with managing the partnership. ->Limited Partner's share of ordinary income is treated as investment income and not subject to SE tax.

What hurdles (or limitations) must partners overcome before they can ultimately deduct partnership losses on their tax return?

1. Tax Basis Limitation 2. The At-Risk Loss Limitation 3. The Passive Activity Loss Limitation

What types of business entities are taxed as flow-through entities?

1.Partnerships -General Partnerships -Limited Partnerships -Limited Liability Companies(LLC) 2. S Corporations

Partner's Initial Tax Basis for partners contributing partners

=Basis of contributed property -Debt securing contributed property +Partnership debt allocated to contributing partner +Gain recognized

What is the inside basis and outside basis, and why are they relevant for taxing partnerships and partners?

Inside Basis-The basis the partner takes in the asset that the partnership holds. ->Necessary to compute the gain/loss recognized on all property sold by the partnership. Outside Basis-The tax basis each partner has in the partnership. ->Necessary to compute the gain/loss recognized on the partnership interest when sold.`

Why must separately stated items be separately stated to the partners?

Separately stated items must be take out of ordinary income because these items either: 1. Relate only to a specific partner -or- 2. The item is taxed differently for each partner depending on the entity of the partner and the partner's current tax situation.

Common Separately State Items

Short-Term Capital Gains (Losses) Long-Term Capital Gains (Losses) Section 1231 Gains (Losses) Charitable Contributions Dividends Interest Income Guaranteed Payments* Net Earnings(Losses) from Self-Employment Tex-Exempt Income Net Rental Real Estate Income Investment Interest Expense Section 179 Deductions

Under what circumstances is it possible for partners to recognize gain when contributing property to partnership?

When the property contributed is secured by debt, partner must recognize gain when debt relief exceeds the partner's basis in her partnership interest before debt relief. ->Liabilities assumed by the partner are deemed to be cash distributions from the partnership to the partner. ->Compare the cash deemed to have been received with the tax basis of the partner's partnership interest prior to the deemed cash distribution. -> If the cash deemed to have been received exceeds the tax basis immediately before the deemed distribution, then a gain must be recognized. NOTE: This can happen if the assumption of the partner's liability is in excess of the partner's basis of the contributed property.