5d - Partnership Taxation
Patti and Kae formed a partnership in which they share income and losses equally. Kae contributes land on which there is a recourse mortgage of $18,000. The land has an adjusted basis to Kae of $15,000 and a fair market value of $20,000 at the time of the contribution. Patti contributes $2,000 to the partnership in cash. What amount of gain should Kae recognize as a result of the contribution of property?
$0
Strom acquired a 25% interest in Ace Partnership by contributing land having an adjusted basis of $16,000 and a fair market value of $50,000. The land was subject to a $24,000 mortgage, which was assumed by Ace. No other liabilities existed at the time of the contribution. What was Strom's basis in Ace?
$0 $16,000 -18, 000 (.75*24,000) Less: 75% x $24,000 Strom has a recognized gain of $ 2,000 ======== and Strom has a 0 basis in Ace Carryover Basis $16,000 Add gain on transfer 2,000 Total 18,000 Less liability assumed (18,000) Ending Basis $ 0
Able, an individual, is a partner in CD Partnership with an adjusted basis of $30,000 for Able's partnership interest. Able received a nonliquidating distribution of $25,000 cash and property with an adjusted basis of $7,000, and a fair market value of $10,000. What amount of gain should Able recognize?
$0 Generally, a partner does not recognize a gain or loss when property is distributed in something other than the liquidation of a partner's interest. In this case, the partner would receive the property with an adjusted basis equal to their remaining basis in the partnership. If they were to subsequently sell or dispose of the property, then they would realize a gain (loss) on it at that time.
Jack and Ted formed an equal partnership. Jack contributed $10,000 cash and Ted contributed depreciable equipment that he has owned for 6 months with a fair market value of $10,000 and an adjusted basis of $2,000. Ted had taken $3,000 in depreciation on the equipment before he transferred it to the partnership. What amount should Ted report as a gain as a result of this transaction?
$0 Ted's contribution of property with an FMV (fair market value) of $10,000 and an adjusted basis of $2,000 does not result in a gain from the transfer to the partnership.
Campbell acquired a 10% interest in Vogue Partnership by contributing a building with an adjusted basis of $40,000 and a fair market value of $90,000. The building was subject to a $60,000 mortgage that was assumed by Vogue. The other partners contributed cash only. The basis of Campbell's partnership interest in Vogue is:
$0. 40,000 -54,000 (liabilities assumed by other partners) = -14,000 Campbell has recognized gain of 14,000 40,000 +14,000 gain on transfer -54,000 = 0 basis
Gavin, a 50% partner in the ABC Partnership, had a $4,000 basis at the beginning of the preceding year. During the preceding year, ABC incurred a $12,000 loss. In the current year, ABC reported $7,000 of ordinary income and made a $1,000 pro rata distribution. What is Gavin's basis at the end of the current year?
$1,000 4,000 Basis - 6,000 Share of prior year loss = 2,000 Carry forward 3,500 (50% income) - 2,000 Carry Forward - 500 (50% pro rata distribution) = 1,000
Aston and Becker are equal partners in AB Partnership. In the tax year, the ordinary income of the partnership is $20,000, and the partnership has a long-term capital gain of $12,000. Aston's basis in AB was $40,000, and he received distributions of $5,000 during the year. What is Aston's share of AB's ordinary income?
$10,000 ***Capital gains will retain the same character on the tax return of the individual partner and, therefore, are a separately reported item on the partner's Schedule K-1. Capital gains are not considered ordinary income. The distribution does not exceed basis, so it is not taxable.
The YZ partnership had the following income items during the year. Income from operations $10,000 Section 1231 gain 7,000 Dividend income 6,000 Recovery of bad debt previously written off 1,000 What amount should be reported as ordinary income by the partnership for the year?
$10,000 ***Separately stated items include capital gains and losses, Section 1231 items, investment income and expenses, and items subject to the tax benefit rule. The recovery of bad debt previously written off of $1,000 is an item subject to the tax benefit rule and is specifically listed as a separately stated item in
Partner A received inventory items with a basis of $20,000 in complete dissolution of a partnership. Within 5 years, Partner A sells the entire inventory for $30,000. What amount and type of gain should Partner A report?
$10,000 ordinary gain
Michael has a partnership interest with a zero basis. The partnership has inventory valued at $250,000. Michael's share of the ordinary income to be received from the sale of the inventory would be $10,000. In 20X1, Michael sells his partnership interest for $30,000. Michael will report the following gain in 20X1:
$10,000 ordinary gain and $20,000 capital gain.
On June 1, Kelly received a 10% interest in Rock Co., a partnership, for services contributed to the partnership. Rock's net assets at that date had a basis of $70,000 and a fair market value of $100,000. In Kelly's income tax return, what amount must Kelly include as income from transfer of partnership interest?
$10,000 ordinary income When a partner contributes services for a partnership interest, the partner must include the fair market value (FMV) of the services rendered as ordinary income. Kelly will include $10,000 as ordinary income, which is 10% of the FMV of the partnership's net assets ($100,000).
Bryan had a 50% interest in a partnership and he materially participates in the partnership business. Bryan's adjusted basis in the partnership was $40,000 at the beginning of 20X7. There were no distributions to Bryan during the year. During 20X7, the partnership borrowed $180,000 from a local bank for the following reasons: Purchased business equipment $120,000 Paid off existing liabilities in full 60,000 All of the partners are personally liable for all of the partnership debts. The partnership incurred a $300,000 loss in 20X7. What amount of the loss can Bryan claim on his 20X7 individual tax return?
$100,000 A partner's distributive share of partnership loss is allowed only to the extent of the adjusted basis of the partner's partnership interest. 40,000 Adjusted Basis + 60,000 (Assumed Liabilities of Partnership)((50% x (180,000-60,000)) =100,000 New Adjusted Basis 150,000 loss is Bryans. But limited to the 100,000 basis
Melissa contributed property with an adjusted basis of $100,000 and a fair market value of $134,000 to the partnership. As a result of the contribution, Melissa recognized a gain of $12,000. What is the partnership's basis for determining depreciation and gain or loss on the disposition of the property?
$112,000 ***If a partner contributes property to a partnership, the partnership's basis for determining depreciation, depletion, and gain or loss for the property is the same as the partner's adjusted basis for the property when it was contributed, increased by any gain recognized by the partner at the time of contribution.
The L&J Auto Parts Store operated as an accrual-based partnership and filed an IRS Form 1065. In addition to receipts from parts sales of $250,000, they had the following other items of income and expenses for the current year: Salaries $(50,000) Insurance (5,000) Charitable Contributions (5,000) Licenses (5,000) Rental Income 25,000 Guaranteed Payments to Partners (75,000) What is the correct ordinary income or loss that L&J should report on their IRS Form 1065?
$115,000 250,000 - 50,000 Salaries - 5,000 Insurance - 5,000 Licenses - 75,000 Guaranteed Payments = 115,000 The charitable contributions and rental income would be separately reported to the partners.
Nolan designed Timber Partnership's new building. He received an interest in the partnership for the services. Nolan's normal billing for these services would be $80,000 and the fair market value of the partnership interest he received is $120,000. What amount of income should Nolan report?
$120,000 Nolan has provided services to the new Timber Partnership building by designing the building. Nolan should report income for services based on the value of the assets received for his services.
Under the terms of a partnership agreement, Anna is entitled to a fixed annual payment of $10,000 without regard to the income of the partnership. Her distributive share of the partnership income is 10%. The partnership has $50,000 of ordinary income after deducting the guaranteed payment. Which of the following states the amount and character of Anna's income from the partnership?
$15,000 of ordinary income 5,000 (50,000 x 10%) +10,000 guaranteed payment =15,000
Bailey contributed land with a fair market value of $75,000 and an adjusted basis of $25,000 to the ABC Partnership in exchange for a 30% interest. The partnership assumed Bailey's $10,000 recourse mortgage on the land. What is Bailey's basis for his partnership interest?
$18,000 25,000 Adjusted basis - 7,000 (partners assumed liability)(.7 * 10,000) = 18,000
Flagg and Miles are each 50% partners in Decor Partnership. Each partner had a $200,000 tax basis in the partnership. Decor's net business income before guaranteed payments was $45,000. During the current year, Decor made a $7,500 guaranteed payment to Miles for deductible services rendered. What total amount from Decor is includible in Flagg's current-year tax return?
$18,750 Flagg 18,750 Miles 26,250 45,000 -7,500 = 37,500 x.5 = 18,750 18,750 + 7500 = 26,250
Partner A's basis in partnership ABC is $5,000 at the beginning of the year. During the year, Partner A received a nonliquidating distribution of $3,000 cash and property with an adjusted basis of $4,000 and fair market value of $5,000. What was Partner A's basis in the property received?
$2,000 5,000 - 3,000 = 2,000 Remaining is the basis in the property
Manny, Moe, Matilda, and Shep are partners in a manufacturing business. The partnership is on a calendar tax year. They were so busy making money that they forgot to file their year 16 personal and partnership tax returns on a timely basis. They finally filed them on June 30, year 17. What is the correct penalty the partnership will be assessed for late filing of the partnership return?
$210 per partner times four months A domestic partnership must file Form 1065 by the 15th day of the 3rd month following the date its tax year ended. The penalty for late filing is $210 per partner for each month, or part of a month, that the return is late, up to 12 months.
Acme Partnership reported the following items of income and expense: Sales $200,000 Cost of goods sold 115,000 Interest expense on bank line of credit 13,000 Charitable contributions 2,000 Administrative expenses 50,000 Long-term capital gain 10,000 What amount should be reported as ordinary income?
$22,000 200,000 Sales -115,000 COGS -13,000 Interest on LOC -50,000 G&A = 22,000
D owned a 25% interest in the ABCD partnership. ABCD had operating income of $60,000 before guaranteed payments to partners. The only guaranteed payment made during the year was $10,000 to D. ABCD also had a net capital gain of $10,000. D should report income from the partnership of:
$25,000. 60,000 - 10,000 =50,000 12,500 (50,000*.25) + 10,000 (guaranteed payment) +2,500 (.25 * 10,000) = 25,000
Under terms of the partnership agreement, Joyce is entitled to a fixed annual payment of $20,000 and her partner $30,000 without regard to the income of the partnership. Joyce's distributive share of the partnership income is 10%. The partnership income is $60,000 of ordinary income after deducting the guaranteed payments. How much ordinary income from the partnership will be included on Joyce's individual income tax return?
$26,000 60,000 (deduction for guaranteed payments already taken out) x .10 =6,000 + 20,000 fixed annual guaranteed payment =26,000
Greg and Elaine formed Spring Lawn, Ltd., a calendar year partnership, in 20X2 to provide yard maintenance to residential customers. Before they began operations in May 20X2, they incurred legal fees of $2,000 and consulting expenses of $1,000 to draft the partnership agreement and file the required forms. They also paid a commission of $600 to a broker to market partnership interests. If duly elected, how much of these expenses may be deducted as organization costs on Spring Lawn's partnership tax return for 20X2?
$3,000 Organization expenses that can be amortized by a partnership, which include: 1. legal fees for services incident to the organization of the partnership, such as negotiation and preparation of a partnership agreement 2. accounting fees for services incident to the organization of the partnership 3. filing fees.
Decker, an individual, owns 100% of Acre, an S corporation. At the beginning of the year, Decker's basis in Acre was $25,000. Acre had ordinary income during the year in the amount of $10,000 and a long-term capital loss in the amount of $4,000. Decker has no other capital gains or losses during the year. What amount of the long-term capital loss may Decker deduct this year?
$3,000 Since individuals are limited to capital loss recognition of $3,000 each year, Decker may only deduct a total of $3,000. There will be a $1,000 capital loss carryover on his individual return.
Jacob contributes property with a fair market value of $7,000, adjusted basis of $4,000, and a mortgage of $1,000, which the partnership assumes, to a partnership for a 40% interest in the partnership. What is Jacob's basis in his partnership interest?
$3,400 4,000 - 600 (partnerships share of liabilities) = 3,400
PDK, LLC, had three members with equal ownership percentages. PDK elected to be treated as a partnership. For the tax year ending December 31, Year 1, PDK had the following income and expense items: Revenues $120,000 Interest income 6,000 Gain on sale of securities 8,000 Salaries 36,000 Guaranteed payments 10,000 Rent expense 21,000 Depreciation expense 18,000 Charitable contributions 3,000 What would PDK report as nonseparately stated income for Year 1 tax purposes?
$35,000 120,000 Revenues - 36,000 Salaries - 10,000 Guaranteed payments - 21,000 Rent expense - 18,000 Depreciation expense = 35,000 Items Excluded and Passed to Partners: Interest Income Gain on sale of securities Charitable contributions
As a general partner in Greenland Associates, an individual's share of partnership income for the current tax year is $25,000 ordinary business income and a $10,000 guaranteed payment. The individual also received $5,000 in cash distributions from the partnership. What income should the individual report from the interest in Greenland?
$35,000 25,000 Ordinary business income 10,000 guaranteed payment =35,000 Cash distributions from the partnership have no bearing on the income reported by the partner. The cash distribution will decrease the partner's basis in the partnership interest.
In the current year, a partnership reported the following items: Fees earned $500,000 Salary expense 100,000 Utility expense 5,000 Charitable contributions 8,000 Long-term capital gain 2,000 Office supplies 500 What is the partnership's ordinary income?
$394,500 Items that receive special consideration on an individual's return must be excluded from ordinary gain or loss, and here include the charitable contributions of $8,000 and long-term capital gains of $2,000. 500,000 - 100,000 - 5,000 - 500 = 394,500
Hart's adjusted basis in Best Partnership was $9,000 at the time he received the following nonliquidating distributions of partnership property: Cash $5,000 Land Adjusted basis 7,000 Fair market value 10,000 What was the amount of Hart's basis in the land?
$4,000 9,000 -5,000 =4,000 Basis in the land
Kline and Salomon form the KS Partnership as 50/50 partners. Kline contributes equipment that has a fair market value of $60,000 and an adjusted basis of $45,000. In addition, the equipment is subject to a $10,000 loan that KS Partnership is assuming. What amount represents Kline's initial basis in the partnership?
$40,000 45,000 Adjusted Basis - 5,000 (Liabilities assumed by other partners)(10k x 50%) = 40,000
Michael has a partnership interest with a zero basis. The partnership has inventory valued at $350,000. Michael's share of the ordinary income to be received from the sale of the inventory would be $40,000. In 20X1, Michael sells his partnership interest for $55,000. Michael will report the following gain in 20X1:
$40,000 ordinary gain and $15,000 capital gain.
Baker acquired a 50% interest in Kode Partnership by contributing $20,000 cash and a building with an adjusted basis of $26,000 and a fair market value of $42,000. The building was subject to a $10,000 mortgage which was assumed by Kode. The other partners contributed cash only. What is the basis of Baker's interest in Kode?
$41,000 20,000 26,000 -5000 (mortgage liability contributed) =41,000
Jetson and Tomson are equal partners in JT Partnership, which has the following income and expense items: Sales $100,000 Interest income from checking account 1,000 Charitable contributions 3,000 Employee wages 4,000 Cost of goods sold 50,000 What is the nonseparately stated partnership income?
$46,000 100,000 - 4,000 - 50,000 = 46,000 Charitable contributions and interest income are passed on the shareholders individual K-1s
Curry's adjusted basis in Vantage Partnership was $5,000 at the time he received a nonliquidating distribution of land. The land had an adjusted basis of $6,000 and a fair market value of $9,000 to Vantage. What was the amount of Curry's basis in the land?
$5,000 Normally the basis would be 6,000, but it is limited to the 5,000 basis Curry has in the partnership
Able and Baker are equal members in Apple, an LLC. Apple has elected not to be treated as a corporation. Able contributes $7,000 cash and Baker contributes a machine with a basis of $5,000 and a fair market value of $10,000, subject to a liability of $3,000. What is Apple's basis for the machine?
$5,000 The basis of contributed property is the same in the hands of the partnership as it was in the hands of the partner who contributed it. The liability Apple assumes will decrease Baker's adjusted basis in his interest in Apple and will increase Able's adjusted basis in his interest in Apple.
A partnership, in which Jane is a 50% owner, had a profit of $80,000 before deducting any compensation to the partners as a guaranteed payment. The partnership agreement provides for a 50-50 sharing of income. Capital is a material income-producing factor. During the year, Jane performed services worth $20,000. What is the total income Jane should report from the partnership?
$50,000 80,000 -20,000 = 60,000 30,000 (50% x 60,000) 20,000 (add back her income for services performed) =50,000
Kerr and Marcus form KM Partnership with a cash contribution of $80,000 from Kerr and a property contribution of land from Marcus. The land has a fair market value of $80,000 and an adjusted basis of $50,000 at the date of the contribution. Kerr and Marcus are equal partners. What is Marcus's basis immediately after formation?
$50,000 The basis of a partnership interest acquired through the contribution of unencumbered property to a partnership is equal to the adjusted basis of the property contributed. Therefore, Marcus's basis in his partnership interest after formation is equal to the adjusted basis of the land he contributed, $50,000.
Turner, Reed, and Sumner are equal partners in TRS partnership. Turner contributed land with an adjusted basis of $20,000 and a fair market value (FMV) of $50,000. Reed contributed equipment with an adjusted basis of $40,000 and an FMV of $50,000. Sumner provided services worth $50,000. What amount of income is recognized as a result of the transfers?
$50,000 The general rule is that when a partner contributes "property" to a partnership, no gain or loss is recognized. The exception to the general rule is that when a partner contributes "services" to a partnership, the partner will recognize ordinary compensation income on the fair market value of the services rendered.
Thompson's basis in Starlight Partnership was $60,000 at the beginning of the year. Thompson materially participates in the partnership's business. Thompson received $20,000 in cash distributions during the year. Thompson's share of Starlight's current operations was a $65,000 ordinary loss and a $15,000 net long-term capital gain. What is the amount of Thompson's deductible loss for the period?
$55,000 60,000 -20,000 +15,000 =55,000 Loss up to 55,000 Loss Carryforward 10,000
Carol owns 50% of the capital interest in ABC Partnership and 50% of the profits interest in XYZ Partnership. In 20X0 for $100,000, ABC Partnership sells land to XYZ Partnership, which XYZ Partnership will use in its trade or business. The ABC Partnership's adjusted basis in the land at the time of the sale was $120,000. In 20X2, the XYZ Partnership sells the land to an unrelated third party for $160,000. How much gain will the XYZ Partnership recognize in 20X2?
$60,000
Molloy contributed $40,000 in cash in exchange for a 1/3rd interest in the RST Partnership. In the first year of partnership operations, RST had taxable income of $60,000. In addition, Molloy received a $5,000 distribution of cash and, at the end of the partnership year, Molloy had a 1/3rd share in the $18,000 of partnership recourse liabilities. What was Molloy's basis in RST at year-end?
$61,000 40,000 Basis + 20,000 (1/3 * 60,000 income) -5,000 (Distribution received) +6,000 (1/3 * 18,000 Liabilities assumed) = 61,000
Hunter contributed artwork in exchange for a partnership interest. The artwork had an adjusted basis of $7,000, had a fair market value of $50,000, and was subject to a loan of $5,000. What is the partnership's basis in the artwork?
$7,000 In this example, the adjusted basis of $7,000 is less than the fair market value (FMV) of $50,000. Thus, the partnership's basis in the artwork is $7,000.
Owen's tax basis in Regal Partnership was $18,000 at the time Owen received a nonliquidating distribution of $3,000 cash and land with an adjusted basis of $7,000 to Regal and a fair market value of $9,000. Regal did not have unrealized receivables, appreciated inventory, or properties that had been contributed by its partners. Disregarding any income, loss, or any other partnership distribution for the year, what was Owen's tax basis in Regal after the distribution?
$8,000 18,000 Basis - 3,000 cash distribution - 7,000 adjusted basis of distributed land = 8,000
Acme and Buck are equal members in Dear, an LLC. Dear has not elected to be taxed as a corporation. Acme contributed $7,000 cash and Buck contributed a machine with an adjusted basis of $5,000 and a fair market value of $10,000, subject to a liability of $3,000. What is Acme's basis in Dear?
$8,500 7,000 Basis 1,500 (3,000 x .5)(Share of other partners contributed liability assumed)
Johnson, an individual, has a 50% interest in DEF Partnership. Johnson's adjusted basis at the beginning of the year was $14,000. The partnership's ordinary income for the current year was $6,000. Johnson received a nonliquidating distribution of $8,000 cash, and property with an adjusted basis of $12,000 and a fair market value of $15,000. What is the basis of the distributed property, other than cash, to Johnson?
$9,000 14,000 Basis + 3,000 (share of income) - 8,000 (cash distribution) =9,000 Basis Normally basis would be the adjusted basis of property received, but the 12k in adjusted property basis is greater than the basis of the partner. Therefore 9k basis is correct
Max Million acquired a 20% interest in a partnership by contributing property that had an adjusted basis to him of $16,000 and an $8,000 mortgage. The partnership, which had no other debts, assumed payment of the mortgage. What is the basis of Max's interest?
$9,600 16,000 -6,400 (80% * 8,000) =9,600
A guaranteed payment by a partnership to a partner for services rendered may include an agreement to pay: 1. a salary of $5,000 monthly without regard to partnership income. 2. a 25% interest in partnership profits.
1 only Note: Guaranteed payments are payments to a partner for services or capital without regard to partnership income.
Which of the following should be used in computing the basis of a partner's interest acquired from another partner?
1. Cash paid by transferee to transferor 2. Transferee's share of partnership liabilities The adjusted basis of a partnership interest includes any cash paid plus the new partner's share of any partnership liabilities. Thus, both statements A and B should be included in the adjusted basis.
What are some of the unincorporated entities that can be taxed as partnerships? (3)
1. Pool 2. Group 3. Joint Venture
What is the tax consequence to a partner who contributes services in exchange for a partnership interest? (3)
1. Taxable to partner 2. Ordinary income 3. Fair market value used in determining extent of income
All of the following items will increase the basis of a partner's interest in a partnership (3)
1. contributions of cash or property to the partnership. 2. assumption of liabilities 3. distributive share of nontaxable income.
Guaranteed payments made by a partnership to partners for services rendered to the partnership, that are deductible business expenses under the Internal Revenue Code, are:
1. deductible expenses on the U.S. Return of Partnership Income, Form 1065, in order to arrive at partnership income (loss). 2. reported on Schedule K-1 to be taxed as ordinary income to the partner who provided the service.
a partner's basis is decreased (but never below zero) by events such as: (4)
1. partner's distributive share of the partnership's losses, 2. partner's distributive share of nondeductible partnership expenses that are not capital expenditures, 3. money and adjusted basis of property distributed to a partner by the partnership, and 4. the partner's deduction for depletion for any partnership oil and gas wells, up to the proportionate share of the adjusted basis of the wells allocated to the partner.
If property contributed to a partnership is distributed to a partner other than the contributing partner within seven years of its contribution to the partnership, all of the following will apply (3)
1. the contributing partner will be required to recognize the built-in gain or loss at the time of the disqualified distribution. 2. the contributing partner's gain recognized is limited to the gain that would be recognized by the partnership. 3. the basis in the property and partnership interests will be adjusted for the gain or loss recognized.
A partnership had four partners. Each partner contributed $100,000 cash. The partnership reported income for the year of $80,000 and distributed $10,000 to each partner. What was each partner's basis in the partnership at the end of the current year?
110,000 100,000 Contribution 20,000 (1/4 * 80,000)(% of income) -10,000 Distribution = 110,000
White has a 1/3rd interest in the profits and losses of Rapid Partnership. Rapid's ordinary income for the calendar year is $30,000, after a $3,000 deduction for a guaranteed payment made to White for services rendered. None of the $30,000 ordinary income was distributed to the partners. What is the total amount that White must include from Rapid as taxable income in his tax return?
13,000 10,000 (30,000 * 1/3)(the 30k included the guaranteed deduction already) +3,000 guaranteed payment =13,000
In return for a 20% partnership interest, Skinner contributed $5,000 cash and land with a $12,000 basis and a $20,000 fair market value to the partnership. The land was subject to a $10,000 mortgage that the partnership assumed. In addition, the partnership had $20,000 in recourse liabilities that would be shared by partners according to their partnership interests. What amount represents Skinner's basis in the partnership interest?
13,000 5,000 Cash 12,000 Land -8,000 (80% partners share of his contributed liability) 4,000 (20% of 20,000 in recourse liabilities) = 13,000
Walker transferred property used in a sole proprietorship to the WXYZ partnership in exchange for a 1/4th interest. The property had an original cost of $75,000, an adjusted tax basis to Walker of $20,000, and fair market value of $50,000. The partnership has no liabilities. What is Walker's basis in the partnership interest?
20,000 Transfers at adjusted basis
Anderson and Decker are equal members in Andek, an LLC, which has not elected to be treated as a corporation. Anderson contributes $7,000 cash, and Decker contributes a machine with an adjusted basis of $5,000 and fair market value of $10,000, subject to a liability of $3,000. What is Decker's basis in Andek?
3,500 5,000 Basis - 1,500 (His share of partnership liabilities (50% * 3,000) =3,500
Anderson's basis in the SBF Partnership is $80,000. Anderson received a nonliquidating distribution of $50,000 cash, and land with an adjusted basis of $40,000 and a fair market value of $50,000. What is Anderson's basis in the land?
30,000 80,000 -50,000 =30,000 Remaining basis goes to the land
Evan, a 25% partner in Vista Partnership, received a $20,000 guaranteed payment for deductible services rendered to the partnership. Guaranteed payments were not made to any other partner. Vista's partnership income consisted of: Net business income before guaranteed payments $80,000 Net long-term capital gains 10,000 What amount of income should Evan report from Vista Partnership on her tax return?
37,500 80,000 -20,000 =60,000 x .25 =15,000 +20,000 =35,000 +2,500 (10,000 *.25) Capital Gains = 37,500
Comfy Chairs Manufacturing, Ltd., operates as a partnership and files Form 1065. Comfy manufactures inflatable lounge chairs. During tax year ended December 31, 20X2, Comfy generated income and expenses as stated below. What is the correct amount of ordinary income (loss) from trade or business activities Comfy should report on Form 1065 (Schedule K) for 20X2? Employee wages $15,000 Income from rental real estate 20,000 Charitable contributions 500 Cost of goods sold 10,000 Income from chair sales 75,000
50,000 75,000 income -10,000 COGS -15,000 wages = 50,000 Income from rental real estate and charitable contributions are special items passed to individual partner's return.
Smith received a 1/3rd interest in a partnership by contributing $3,000 in cash, stock with a fair market value of $5,000 and a basis of $2,000, and a new computer that cost Smith $2,500. Which of the following amounts represents Smith's basis in the partnership?
7,500 3,000 Cash 2,000 Stock basis 2,500 Computer at cost = 7,500
Which one of the following statements regarding a partnership's tax year is correct?
A partnership may elect to have a tax year other than the generally required tax year, if the deferral period for the tax year elected does not exceed three months.
John is a partner in the Milo partnership. During 20X7, John personally assumed $10,000 of the partnership's liabilities. How is the assumption of partnership debt by John treated?
As an increase in John's basis in the partnership
Which of the following limitations will apply in determining a partner's deduction for that partner's share of partnership losses?
At-risk: Yes; Passive loss: Yes Level 1: Any deductible loss is limited to the adjusted basis of the partner's interest in the partnership. Level 2: If there is enough adjusted basis to deduct a loss, then the partner is only allowed to deduct the amount of loss for which he is at risk. Level 3: If there is enough adjusted basis and enough at risk, then the partner applies the passive activity limits.
Bill and Jimmy formed a new partnership. Bill contributes property that has an adjusted basis of $1,400 and a fair market value of $2,000 to the partnership. Jimmy contributes $2,000 in cash to the partnership. Each partner's capital account as reflected on the partnership's books is $2,000. What is the adjusted basis of each partner's interest?
Bill's at $1,400 and Jimmy's at $2,000
What is the general rule for inclusion in gross income for a partnership?
Exclude items that receive special consideration on an individual's return
A $100,000 increase in partnership liabilities is treated in which of the following ways?
Increases each partner's basis in proportion to their ownership Increases in the liabilities of the partnership are treated as though the partner contributed money for a share of the liabilities. The basis of the partner's investment increases accordingly.
What is the consequence to the partner following the assumption of a partner's personal liability?
It is treated as a distribution of money to the partner. Increases in the liabilities of the partnership are treated as though the partner received money for a share of those liabilities; the basis of the partner's investment increases accordingly.
Shizaam Bakery operates as a calendar-year partnership. Shizaam's two partners, Kalla and Henry, share profits and losses 60% and 40%, respectively. For tax year ended December 31, 20X2, Shizaam had the following income and expense: Gross sales $270,000 Cost of goods sold 80,000 Interest income from bank 2,500 Wages expense 50,000 Short-term capital loss 5,000 Compute the partnership's ordinary income and flow through amounts to partners.
Kalla—ordinary income $84,000, interest income $1,500, and short-term capital loss $3,000; Henry—ordinary income $56,000, interest income $1,000, and short-term capital loss $2,000
Which of the following items is included in ordinary income of a partnership when the two partners share profits and losses equally?
Misc. ordinary income split in 60/40 ratio: No; Tax-exempt interest income: No Items allocated differently from the general profit and loss ratio must be separately stated. Tax-exempt income is not included in ordinary income because it is not taxable.
At partnership inception, Black acquires a 50% interest in Decorators Partnership by contributing property with an adjusted basis of $250,000. Black recognizes a gain if: 1. the fair market value of the contributed property exceeds its adjusted basis. 2. the property is encumbered by a mortgage with a balance of $100,000.
Neither
Is the basis of a partner's interest computed with regard to the capital account of the partner?
No
Chip and Dale each have a 50% interest in a partnership. Chip uses a calendar year while Dale has a fiscal year ending November 30. Assuming that the partnership does not make a Section 444 election and does not establish a business purpose for a different period, what tax year must the partnership use to file its tax return?
November 30 The partnership must use a tax year ending on November 30 because this results in the least aggregate deferral of income to the partners.
Which of the following statements regarding partnerships is false?
Partnerships are taxable entities. Except in rare instances, a partnership is not a taxable entity; it is a pure pass-through entity. As such, partners are subject to the passive loss rules, and the standard deduction is not available at the partnership level.
For which of the following entities is the owner's basis increased by the owner's share of profits and decreased by the owner's share of losses but is not affected by the entity's bank loan increases or decreases?
S corporation
What is the result of a contribution of property by a partner to a partnership?
Same basis as in the hands of the partner The basis of contributed property is the same in the hands of the partnership as it was in the hands of the partner who contributed it. Generally, no gain or loss is recognized by either the partner or the partnership when a partner increases an investment through the contribution of property, and the holding period of the partner carries over to the partnership.
For property contributed to a partnership after June 8, 1997, a partnership must hold contributed property how long before distributing it to avoid precontribution gain being taxed to the contributing partner?
Seven years
An S corporation pays one of its individual shareholders for services rendered to the S corporation, and a general partnership pays one of its partners for services rendered to the partnership. Which of the following statements is accurate regarding these payments?
The S corporation should classify the payments as deductible wages reportable on Form W-2. Partners are not employees and should not be issued a Form W-2. The partnership must furnish copies of Schedule K-1 (IRS Form 1065) to the partner. These payments are considered deductible distributions to the corporation.
What is the treatment of guaranteed payments to partners?
Treated as ordinary income by partners, deductible by the partnership
The individual partner rather than the partnership makes which of the following elections?
Whether to take a deduction or credit for taxes paid to foreign countries
J and K formed a general partnership by contributing $10,000 each. The partnership incurred a loss of $30,000 in year 1, income of $6,000 in year 2, and income of $10,000 in year 3. What is the adjusted basis for tax purposes of each partner's interest in the partnership at the end of each year?
Year 1: $0; year 2: $0; year 3: $3,000 10,000 Basis -15,000 (50% * 30,000) = -5,000 Loss carry forward. Basis cannot be below zero -5,000 + 3,000 (50% * 6,000) = -2,000 Loss carry forward. Basis cannot be below zero -2,000 + 5,000 (50% * 10,000) =3,000 Year 3 Basis
Mutt and Jeff each have a 50% interest in Keni Partnership. The partnership and the individuals file on a calendar-year basis. For its Year 4 tax year, Keni had a $30,000 loss. Mutt's adjusted basis in the partnership interest on January 1, Year 4, was $8,000. In Year 5, Keni partnership had a profit of $28,000. Assuming that there were no other adjustments to Mutt's basis in the partnership in Year 4 and Year 5, what amount of partnership income (loss) would Mutt show on his Year 4 and Year 5 individual income tax returns?
Year 4: $(8,000); Year 5: $7,000 8,000 Basis -15,000 Share of loss = -7,000 year 4 BUT limited to basis so 8,000 loss and 7,000 carry forward 28,000 x.5 = 14,000 - 7,000 carry forward =7,000 year 5
The at-risk limitation provisions of the Internal Revenue Code (IRC) may limit:
a partner's deduction for his or her distributive share of partnership losses.
A partner's basis in a partnership is decreased by all of the following, except:
assumption of partnership liabilities. *A partner's basis is increased by the partner's additional contributions to the partnership, including an increased share of, or assumption of, partnership liabilities.
In computing the ordinary income of a partnership, a deduction is allowed for:
guaranteed payments to partners. Charitable contributions made by the partnership and capital losses of the partnership flow through the partnership as separately stated items on Form 1065 K-1 to the individual partners.
Payments made by a partnership to a partner that are determined without regard to the partnership income are called:
guaranteed payments.
Beck and Nilo are equal partners in B&N Associates, a general partnership. B&N borrowed $10,000 from a bank on an unsecured note, thereby increasing each partner's share of partnership liabilities. As a result of this loan, the basis of each partner's interest in B&N was:
increased.
Smith and White contributed $4,000 and $6,000 in cash, respectively, and formed the Macro General Partnership. The partnership agreement allocated profits and losses 40% to Smith and 60% to White. Macro purchased property from an unrelated seller for $10,000 cash and a $40,000 mortgage note that was the general liability of the partnership. Macro's liability:
increases Smith's partnership basis by $16,000. Smith Basis in liability 16,000 (40,000 * .4) White Basis in liability 24,000 (40,000 * .6)
When a partner's share of partnership liabilities increases, that partner's basis in the partnership:
increases by the partner's share of the increase.
All of the following items will increase the basis of a partner's interest in a partnership except:
partner's share of any Section 179 expenses. Deductions for Section 179 expenses decrease the basis of a partner.
Don and Warren formed an equal partnership to build drag racing vehicles. Don contributed $5,000 in cash and Warren contributed a truck with a fair market value of $5,000 and an adjusted tax basis of $4,500. They plan to use the truck for hauling parts and cars. When Warren purchased the truck 1 year earlier, he elected to use the straight-line method to depreciate the truck using the mid-month convention over its 5-year recovery period. The partnership should:
record the truck on the books at $4,500 and depreciate it over its remaining recovery period using the straight-line method and mid-month convention.
Under the Internal Revenue Code sections pertaining to partnerships, guaranteed payments are payments to partners for:
services or the use of capital without regard to partnership income.
The holding period of a partnership interest acquired in exchange for a contributed capital asset begins on the date:
the partner's holding period of the capital asset began.
The method used to depreciate partnership property is an election made by:
the partnership and may be any method approved by the IRS.
