R4.2 Partnership
How to treat partnership loss?
limit to basis
Amount realized upon sale of partnership interest
= cash received + liabilities assumed by the buyer
Curry's sale of her partnership interest causes a partnership termination. The partnership's business and financial operations are continued by the other members. What is (are) the effect(s) of the termination? I. There is a deemed distribution of assets to the remaining partners and the purchaser. II. There is a hypothetical recontribution of assets to a new partnership. a. I only. b. II only. *c. Both I and II.* d. Neither I nor II.
(c) *Rule:* When a partnership is terminated for tax purposes and its remaining partners decide to carry on the partnership business in a (deemed) new partnership, tax law treats this as a distribution of the prior partnership's assets followed by a recontribution of the (deemed) distributed assets to the new partnership.
Current distribution
= nonliquidating distribution
Strom acquired a 25% interest in Ace partnership by contributing land having an adjusted basis of $16,000 and a FMV 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? A. $0 B. $16,000 C. $26,000 D. $32,000
$16,000 basis with a 24,000 mortgage for a 25% interest. 16,000 basis <24,000> amount of liability relieved of +6000 Storms share of liablity =(2000)....basis can't be negative...so *Storms basis is $0*.....the ($2,000) excess of basis amount is treated like taxable boot and is a gain to that partnerF *Ace partnerships basis:* Contributor's Basis + Gain recognized $16,000 contributor's basis <18,000> (24,000 x .75) =<2000> capital gain so: *16,000 + 2000= 18,000*
Holding period
If the contributed asset was capital asset or section 1231, Use old asset holding period, and if the asset is an ordinary income asset (such as Inventory) then the holding period will start from the date of contribution.
Ken Karas owns an 80% interest in the capital and profits of the partnership of Karas & Keel. On July 1 of the current year, Karas bought surplus land from the partnership at the land's fair market value of $30,000. The partnership's basis in the land was $36,000. For the current calendar year end, the partnership's net income was $85,000, after recording the $6,000 loss on the sale of the land. Karas' distributive share of ordinary income from the partnership for the current year was: a. $63,200 b. $91,000 c. $68,000 d. $72,800
Choice "d" is correct. Losses between a controlling partner (over 50% interest in capital and profits) and his controlled partnership from the sale or exchange of property are not allowed. Thus the disallowance of the $6,000 loss would make the ordinary income $91,000 and 80% of that is $72,800.
Recognition of gain in a nonliquidating distribution in a partnership?
General rules: - A nonliquidating distribution to a partner is nontaxable. - In nonliquidating distribution to a partner, the basis of property received will be the same as the basis in the hands of the partnership immediately prior to the nonliquidating distribution. - Distributions to a partner reduce the partner's basis by the cash the partner receives and by the partnership's adjusted basis in property which the partner receives.
Division of a partnership- Deemed to be a continuation of the prior partnership *Note:* Separating the two businesses into two entities does NOT require approval from the IRS
Following the division of a partnership, a resulting partnership is deemed to be a continuation of the prior partnership if the resulting partnership's partners had a more than 50% interest in the prior partnership. *e.g.* Here, as a result of the division, Partnership Abel & Benz is considered to be a continuation of the prior partnership because its partners (Abel and Benz) owned more than 50% of the interests in the prior partnership (i.e., Abel 40% and Benz 20%).
Under which of the following circumstances is a partnership that is *not* an electing large partnership considered terminated for income tax purposes? I. Fifty-five percent of the total interest in partnership capital and profits is sold within a 12-month period. II. The partnership's business and financial operations are discontinued. a. Both I and II. b. II only. c. Neither I nor II. d. I only.
Choice "a" is correct. Such a partnership will be terminated for income tax purposes when either *fifty percent or more* of the total *interest* in capital and profits is *sold within a 12-month period* *or* the partnership's business and financial operations are *discontinued.*
Example: Note payable = 60,000, 3 partners Carr, an equal partner, sold his partnership interest to Dole, an outsider, for $154,000 cash on January 1 of the following year. In addition, Dole assumed Carr's share of the partnership's liability. What was the total amount realized by Carr on the sale of his partnership interest?
Choice "a" is correct. The total amount realized by Carr is $174,000. Rule: The amount realized by a partner on the sale of his partnership interest includes the proportionate share of liabilities assumed by the purchaser, if any. Cash received $ 154,000 Liabilities assumed (60,000 x 1/3) 20,000 Amount realized $ 174,000
Operation of a Partnership
-> Partner is being taxed on When the Income is "EARNED", it doesn't matter if the income is distributed OR Not.-----so if e.g. says the partnership has ordinary income for the current taxable year of $30,000..and that none of the ordinary income was distributed to partners...The partners would still *include their % share* of the ordinary income in their current tax return...no matter if it *NOT DISTRIBUTED* -> Withdrawing money is NON-Taxable, It just reduces the Basis. -> Property Distribution Reduces "Capital Account" by the adjusted basis (NBV) of the distributed property. It CANNOT go past "0" in the Capital Account....see e.g. below... -> Partner may deduct losses as a tax deduction on their personal tax return up to their basis, any excess losses will be suspended until it can offset future income. ->Losses in excess of the at-risk amount may not be deducted currently against income from OTHER activities. Any losses in excess of the at-risk amount are SUSPENDED and carried forward without expiration and are deductible against income in future years from that activity *Note:* Partner Capital Account + Partner share of Liabilities => Partner Year End Basis
Liquidating Distributions
3 ways a partner may liquidate: 1) Complete Withdrawal: a. Non Taxable Liquidation b. Gain Recognized: The Partner receives MORE *money* than the basis then gain will be recognized. *It applies to ONLY Cash Received, NOT Property.* c. Loss Recognized: The loss is recognized if money received is LESS than the partner's adjusted basis during withdrawal.
In the absence of an election to adopt an annual accounting period, the required tax year for a partnership is: a. A tax year that results in the greatest aggregate deferral of income. *b. A tax year of one or more partners with a more than 50% interest in profits and capital.* c. A calendar year. d. A tax year of a principal partner having a 10% or greater interest.
B. A partnership tax year must have the same taxable year as the common taxable year of the partners that, in the aggregate, have interest greater than 50%, which is determined based on the "testing day," the first day of the partnership's tax year (not considering the majority interest rule). *Note:* After a change is made to the "majority-interest" tax year end, the partnership does not have to change to another tax year for two years following the year of change. Exceptions to the rule exist. (1) If there is no "majority-interest" tax year, then the tax year is the tax year of all of the principal partners of the partnership (those owning 5% or more of the income or capital of the partnership). (2) If the partnership is still unable to determine a tax year using the general rule or the first exception, then the tax year that causes the least aggregate deferral of income to the partners must be adopted.
Separately stated items in a partnership returns
Gain on sale of securities Charitable contributions
PROPERTY FOR PARTERSHIP INTEREST EXCHANGE
Non-Taxable Event: No gain or loss recognized --Partner's Basis = Basis of Property Contributed ------*Exception:* When property has a liability that exceeds basis Capital Gain *Example:* $4,000 basis with a $6,000 mortgage for a 20% interest $4,000 basis <6000> liablity relieved of +1200 partners share of liablity =<800> basis....cant be negative so basis must be 0....800 capital gain = $800 Capital Gain --$0 basis for partner... --$4,800 basis for Partnership on the property..calculated as follows: ----Contributor's Basis + Gain recognized Contributor= 4000 + 800 =4,800 partnerships basis
Dale was a 50% partner in D&P Partnership. Dale contributed $10,000 in cash upon the formation of the partnership. D&P borrowed $10,000 to purchase equipment. During the first year of operations, D&P had $15,000 net taxable income, $2,000 tax-exempt interest income, a $3,000 distribution to each partner, and a $4,000 reduction of debt. At the end of the first year of operation, what amount would be Dale's basis? a. $16,500 b. $21,500 c. $17,500 d. $18,500
Rule: The partnership basis formula follows: Basis = Capital Account + Partner's Share of Liabilities Choice "d" is correct. Dale's basis at the end of the first year of operations is calculated as follows: Initial contribution at formation $ 10,000 Net taxable income 7,500 Tax exempt income 1,000 Distributions (3,000) Increase in debt responsible for 5,000 Reduction in debt responsible for (2,000) Basis at year end $ 18,500
To calculate partner's basis in a partnership, should tax-exempt income be included
Yes, it should be included.
Liquidating distributions complete liquidation => remember "Zero out to get out!!"----Basis Used = Partnership interest....Stopping point= Must "Zero-Out" Account nonliquidating => remember "Stop at Zero"...Basis used= NBV Asset taken...Stopping Point= Stop at Zero...
The adjusted basis of Vance's partnership interest in Lex Assoc. was $180,000 before receiving cash of $100,000 and real estate with an adjusted basis to Lex of $70,000 and FMV of who cares in complete liquidation of Lex. What is Vance's basis in the real estate? In a liquidating distribution, the $100,000 cash is applied first to the $180,000 partnership basis, reducing it to $80,000. Even though the partnership's basis in real estate is only $70,000, Vance's basis in the real estate will be his partnerhsip basis ($80,000) sincel this is the last asset distributed and it is liquidating distribution (i.e., Vance's partnerhsip basis must be reduced to zero.) Neither Vance nor the partnership recognized any gain or loss from the distribution.
On June 30, 2012, Berk, a calendar-year taxpayer, retired from his partnership. At that time, his capital account was $50,000 and his share of the partnership's liabilities was $30,000. Berk's retirement payments consisted of being relieved of his share of the partnership liabilities and receipt of cash payments of $5,000 per month for eighteen months, commencing July 1, 2012. Assuming Berk makes no election with regard to the recognition of gain from the retirement payments, he should report income of 2012 2013 a. $13,333 $26,667 b. 20,000 20,000 c. 40,000 -- d. -- 40,000
The requirement is to determine the amount of income from the receipt of retirement payments to be reported by Berk in 2012 and 2013. Payments to a retiring partner are generally treated as received in exchange for the partner's interest in partnership property. As such, they are generally treated under the rules that apply to liquidating distributions. Retirement payments are not deductible by the partnership as guaranteed payments and are not treated as distributive shares of income. Under the rules for liquidating distributions, the $5,000 per month cash payments are treated as a reduction of the basis for Berk's partnership interest, and result in gain to the extent in excess of basis. Berk's $80,000 basis for his partnership interest ($50,000 capital + $30,000 share of liabilities) would first be reduced by the relief from $30,000 of liabilities to $50,000. Next, the $30,000 of cash payments received during 2012 (6 × $5,000) would reduce Berk's basis to $20,000 and result in no gain to be reported for 2012. Finally, the $60,000 of payments for 2013 (12 × $5,000) would exceed his remaining basis and result in Berk's reporting of $40,000 of capital gain for 2013.===> 60,000 payment -20,000 basis= 40,000 gain above basis over payment made Berk's partnership basis on 6/30/Yr 12: *$80,000* $5000 x 6 months, Year 12 cash distribution's nontaxable, basis reductions: *(30,000)* Relief of debt: *(30,000)* = Berk's partnership basis on 12/31/Yr 12: *20,000* $5,000 x 12 months, Year 13 distributions: *(60,000)* =negative basis: (40,000) Capital gian to eliminate negative basis: *$40,000* Berk's basis on 12/31/Yr 13, liquidated: *$0*
On December 31, 2012, after receipt of his share of partnership income, Clark sold his interest in a limited partnership for $30,000 cash and relief of all liabilities. On that date, the adjusted basis of Clark's partnership interest was $40,000, consisting of his capital account of $15,000 and his share of the partnership liabilities of $25,000. The partnership has no unrealized receivables or appreciated inventory. What is Clark's gain or loss on the sale of his partnership interest? a. Ordinary loss of $10,000. b. Ordinary gain of $15,000. c. Capital loss of $10,000. d. Capital gain of $15,000.
(d) The requirement is to determine the amount and character of gain or loss recognized on the sale of Clark's partnership interest. Here, Clark realized $55,000 from the sale of his partnership interest ($30,000 cash + relief from his $25,000 share of partnership liabilities). Since the partnership had no unrealized receivables or appreciated inventory and the basis of Clark's interest was $40,000, Clark realized a capital gain of $55,000 - $40,000 = $15,000 from the sale.
Hart's adjusted basis in Best Partnership was $9,000 at the time he received the following nonliquidating distribution 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? a. $0 *b. $ 4,000* c. $ 7,000 d. $10,000
*(b)* Hart must reduce his original basis by the $5,000 cash distribution (If both cash and noncash property are received in a single distribution, the basis for the partner's partnership interest is first reduced by the cash, before being reduced by noncash property.) $9,000 basis Less ($5,000) cash distribtution = *$4000 remaning basis allocated to land* Smith's basis in the land is the *LESSER* of the land's basis in the partnership's hands ($7000) or Hart's remaining basis in his partnership interest in Best ($4000 after the cash distribution).
Stone and Frazier decided to terminate the Woodwest Partnership as of December 31. On that date, Woodwest's balance sheet was as follows: Cash $2,000 Equipment (adjusted basis) 2,000 Capital - Stone $3,000 Capital - Frazier ; 1,000 The fair market value of the equipment was $3,000. Frazier's *outside basis* in the partnership was $1,200. Upon liquidation, Frazier received $1,500 in cash. What gain should Frazier recognize? A. $0 *b. $300* c. $250 d. $500
*(b)* Frazier's basis in his partnership interest = $1,200. He received $1,500 in cash in the liquidiation. Frazier's gain is calculated as follows: Amount realized: 1500 Basis in partnership interest <1200> =Gain recognized $300
Curry's adjusted basis in Vantage Partnership was $5,000 at the time he received a non liquidating 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? a. $9,000 b. $6,000 *c. $5,000* d. $1,000
*(c)* A partner who receives a distribution of non-cash property from a partnership takes the partnership's basis as his basis *BUT* in no case an amount greater than his basis in his partnership interest. In this case Curry would ordinarily take a $6,000 basis in the land, but since his basis in the partnership interest is only $5,000, that is the basis of the land in his hands. Curry's partnership interest now has a basis of zero..*see below*.. Beg basis: $5,000 Less land distribution (5000) =end basis $0
*Services Contributed Example* On June 1, 2013, 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 2013 income tax return, what amount must Kelly include as income from transfer of the partnership interest? a. $ 7,000 ordinary income. b. $ 7,000 capital gain. *c. $10,000 ordinary income.* d. $10,000 capital gain.
*(c)* Kelly must include as ordinary income the *fair market value of the asset received*, a 10% interest in a partnership valued at $100,000, or $10,000. It is ordinary income since Kelly provided services for the partnership interest. *Use Kelly's share of the fair market value of the partnership, not its adjusted basis*
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 I. The fair market value of the contributed property exceeds its adjusted basis. II. The property is encumbered by a mortgage with a balance of $100,000. a. I only. b. II only. c. Both I and II. *d. Neither I nor II.*
*(d)* The requirement is to determine which statements are correct regarding Black's recognition of gain on transferring property with an adjusted basis of $250,000 in exchange for a 50% partnership interest. Generally, no gain is recognized when appreciated property is transferred to a partnership in exchange for a partnership interest. However, gain will be recognized if the transferred property is encumbered by a mortgage, and the partnership's assumption of the mortgage results in a decrease in the transferor's individual liabilities that exceeds the basis of the property transferred. Here, the basis of the property transferred is $250,000, and the net decrease in Black's individual liabilities is $50,000 (i.e., $100,000 × 50%), so no gain is recognized.
Partners Basis formula : +Cash +Adjusted basis of property -Liabilities (amount assumed by other partners) +FMV of services rendered (if applicable) +Liabilities - other partner's liabilities assumed by incoming partner -reduction of debt (if there is a reduction of debt in a partnership, we would subtract this reduction as we added this debt previously to the basis) e.g. if Q says during year $40,000 partnership liabilities than it goes on to mention that partnership liabilites at end of year are $24,000..Tha mean a reduction of (40,000 - 24,000) 16,000 occurred...which would be deducted from basis according to the partners %. =BASIS
*B*...*Beginning capital account:* -Cash -FMV services -NBV assets -<liability> *A*...*+%All income* -Ordinary -Capital -Tax-free (A partners basis is increased by the partner's share of partneship ordinary income, separately stated income, and tax exempt income) Separately stated income includes: Interest income, Gain on sale of securities, charitable contributions Nonseparately stated income is calculate as follows for example: Revenues: 120,000 Salaries: (36000) Guaranteed payments: (10,000) Rent expense: (21,000) Depreciation expense (18,000) =*Total nonseparately stated income $35,000* *S*...*<%All losses>* -Partner may take a partnership loss as a tax deduction up to his/her basis *<withdrawals> -Property distribution: reduce capital account by the adjusted basis (NBV) of the distributed property; cannot go past zero in the capital account *E*...Ending Capital Account +*%Recourse liabilities* = *Year end basis*
*Sale of Partnership Interest (Liquidation)* As a general rule, the partner has a Capital gain or loss when transferring a partnership interest because a partnership interest is a Capital Asset. The requirement is to determine the amount of *ordinary income that Carr should report on the sale of his partnership interest*. Although the sale of a partnership interest *generally results in capital gain or loss*, *ordinary income* must be *recognized* to the extent of the selling partner's share of *unrealized receivables and appreciated inventory.* *e.g.* Here, Carr must report ordinary income to the extent of his 1/3 share of the unrealized accounts receivable of $420,000/3 , or $140,000.
*Exceptions (Ordinary Income is NOT Capital Gain):* Any Gain that represents partner's share of "Hot Assets" is treated as "Ordinary Income" as if cash were taken. *Hot Assets are:* -> Unrealized Receivables (Cash Basis) -> Appreciated Inventory (if Exchanged for Cash) -> Recapture Income *Note:* No Gain or Loss Recognized when Property is Distributed as Liquidation, but when Cash is Distributed as Liquidation then Gain or Loss is recognized as Capital Gain/(Loss). In Liquidation, If a Partner is Retired and he receives distribution Monthly (like for 24 months) then his Basis should be "Zero Out" First before he can recognize any Gain (If Any)
Organizational Expenditures and Start up Cost
*For Tax Purposes*, $5000 (for 1st Year only) + remaining will be Amortized for each month (up to 180 months). Note Dates, when expense occurred in order to calculate amortization. *For GAAP Purposes*, All gets "Expensed". Syndication Costs (= Offering Materials) Expenditures incurred for promoting and marketing interests, which are capitalized as an intangible assets (Not deductible or amortizable).
Brown, a 50% partner in Brown & White, received a distribution of $12,500 in the current year. The partnership's income for the year was $25,000. What is the character of the payment that Brown received? a. Disproportionate distribution. b. Liquidating distribution. c. Partial liquidation. *d. Current distribution.*
*Rule:* IRC Section 731 controls the taxability of partnership distributions. A partner who receives a distribution from a partnership realizes gain only to the extent that he receives cash in excess of the adjusted basis of his interest in the partnership immediately before the distribution. Choice "d" is correct. This distribution is a current distribution (a distribution other than in liquidation of an entire partnership interest). Brown is a 50% partner and he/she received ½ of the partnership's income in cash.
When Partnership Terminates
*a)* Operation Ceases *b)* 50% or more of the total partnership interest in both capital and profit is Sold or Exchanged within any 12 month period. Partnership Termination Date will be the Date when 50% or more is sold. So, lets say there are 4 partners all together with 25% share of each. And, if 1 partner sold his share of 25% on March 30th year 1 and another partner sold his share of 25% on June 20 Year 1 then the Partnership Termination will start as of June 20 Year 1 *c)* There are less than 2 partners, because if only 1 partner left it is called "Sole Proprietorship"
At-risk limitation provisions of the Internal Revenue Code may limit:
A partner's deduction for his or her distributive share of partnership losses as: A partner's tax deduction for his or her distributive share of partnership losses is limited to the partner's adjusted basis in the partnership, which is increased by any partnership liablities that he or she is personally liable for (called the "at-risk" provision). Any unused loss can be caried forward and used in a future year when basis becomes available, therefore, the at-risk limitation DOES NOT limit a partners net operating loss carryover
Section 444 of the IRC
A partnership must generally adopt the same taxable year as used by its one or more partners owning an aggregate interest of more than 50% in partnership profits and capital. However, under Sec. 444, a partnership can instead elect to adopt a fiscal year that does not result in a deferral period of longer than three months. The deferral period is the number of months between the end of its selected year and the year that it generally would be required to adopt. For example, a partnership that otherwise would be required to adopt a taxable year ending December 31, could elect to adopt a fiscal year ending September 30. The deferral period would be the months of October, November, and December. The partnership is not required to be a limited partnership, be a member of tiered structure, or have less than seventy-five partners.
Reid, Welsh, and May are equal partners in the RWM partnership. Reid's basis in the partnership interest is $60,000. Reid receives a liquidating distribution of $61,000 cash and land with a fair market value of $14,000 and an adjusted basis of $12,000. What gain must Reid recognize upon the liquidation of his partnership interest? a. $13,000 *b. $1,000* c. $15,000 d. $0
B. With a liquidating distribution, the partner's basis for the distributed property is the same as the adjusted basis of his partnership interest, first reduced by any monies received. *The partner will recognize gain only to the extent that money received exceeds the partner's basis in the partnership.* *Gain is recognized because the cash received exceeded the basis in the partnership before the liquidation* *When there is no money distributed, there is NO GAIN* *The partner recognizes loss if ONLY MONEY, unrealized receivables, or inventory are received and if the basis of the assets received is LESS than the partner's basis in the partnership* Basis before liquidating distribution $ 60,000 Less: Cash received (61,000) Gain to be recognized 1,000 Basis after gain recognition $ 0 Note: The basis of the land to Reid is zero, as Reid has no remaining basis in the partnership to allocate to the land (i.e., Reid has exchanged his entire interest in the partnership for the cash and the land).
Why Basis are increased when Liabilities are Increased in Partnership? Since the partner has unlimited liability, the partnership liabilities are treated as if the partner personally borrowed money and then contributed to the partnership.
Because Basis are like whats "At Risk" for that particular Partner, so if Partnership bought a Truck on Loan for their Business then their Basis will Increase for their Share of Liability because that Liability is Added as Risk in the Partnership.
Which of the following limitations will apply in determining a partner's deduction for that partner's share of partnership losses?
Both "at-risk" limits and the "passive loss" limits will apply in determining a partner's deduction for the partner's share of partnership losses. Partners are subject to the basis limitations on losses, the "at-risk" provisions and the passive loss limitations on the lossess passed passed through the partnership
The holding period of a partnership interest acquired in exchange for a contributed capital asset begins on the date: a. The partner is admitted to the partnership. b. The partner's holding period of the capital asset began. c. The partner is first credited with the proportionate share of partnership capital. d. The partner transfers the asset to the partnership.
Choice "b" is correct. *Rule:* 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. Choices "a", "d", and "c" are incorrect, per the above rule.
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: I. Deductible expenses on the U.S. Partnership Return of Income, Form 1065, in order to arrive at partnership income (loss). II. Included on schedules K-1 to be taxed as ordinary income to the partners. a. I only. b. Both I and II. c. II only. d. Neither I nor II.
Choice "b" is correct. Guaranteed payments to partners are deductible on Form 1065, Line 10, to arrive at partnership ordinary income. On Schedule K-1, guaranteed payments are shown as income on Line 5 and flow through as ordinary income to the partners
Alt Partnership, a cash basis calendar year entity, began business on October 1, Year 1. Alt incurred and paid the following in Year 1: Legal fees to prepare the partnership agreement $23,000 Accounting fees to prepare the representations in offering materials 15,000 Alt elected to amortize costs. What was the maximum amount that Alt could deduct on the Year 1 partnership return? a. $4,600 b. $5,300 c. $300 d. $0
Choice "b" is correct. Eligible expenditures up to $5,000 can be deducted in the first year (with overall limitations). Additional expenditures are amortized over 180 months beginning with the date they begin business. Legal fees to prepare the partnership agreement ($23,000) are eligible for this treatment, but sales and promotional expenses ($15,000) are not deductible or amortizable. The first year deduction is calculated as follows: 23,000 legal fees eligible for amortization (5,000) immediate deduction = 18,000 / 180 months = $100 per month x 3 (Oct, Nov, Dec) = 300 + 5,000 = $5,300 We amortize amount after $5,000 immediate deduction over 180 months
Peters has a one-third interest in the Spano Partnership. During 20X1, Peters received a $16,000 guaranteed payment, which was deductible by the partnership, for services rendered to Spano. Spano reported a 20X1 operating loss of $70,000 before the guaranteed payment. What is(are) the net effect(s) of the guaranteed payment? I. The guaranteed payment increases Peters' tax basis in Spano by $16,000. II. The guaranteed payment increases Peters' ordinary income by $16,000. a. I only. *b. II only.* c. Both I and II. d. Neither I nor II.
Choice "b" is correct. The *guaranteed payment increases* Peters' *ordinary income* by $16,000 but *does not affect* Peters' *tax basis* because guaranteed payments are not undistributed earnings (they are distributed to the partner). The answer is "II only." *Rule:* Guaranteed payments are reasonable compensation paid to a partner for services rendered without regard to the partner's ratio of income. They are *allowable tax deductions to the partnership* and *ordinary income to the partner receiving them*. *Note:* A guaranteed payment will not increase a partner's basis in the partnership because the payment has been distributed to the partner. Cash distributions are NOT included in income, but would reduce the partner's basis
When the AQR partnership was formed, partner Acre contributed land with FMV of $100,000 and a tax basis of $60,000 in exchange for 1/3 interest in the partnership. Each partner will share equally in the partnership's G/L. During its first year of operation, AQR sold the land to an unrelated 3rd party for $160,000. Tax treatment? a. Each partner reports a capital gain of $33,333. *b. The first $40,000 of gain is allocated to Acre, and the remaining gain of $60,000 is shared equally by all the partners in the partnership.* c. The first $40,000 of gain is allocated to Acre, and the remaining gain of $60,000 is shared equally by the other two partners.
Choice "b" is correct. The difference between the tax basis of $60,000 and FMV of $100,000 on the date the partnership was formed is a built-in gain to partner Acre. (Land Acre contributed had FMV 100,000 - 60,000 tax basis= 40,000 built in gain...built in gain will be recognized by Acre when the land is sold.... Accordingly, the first $40,000 of gain out of of the total gain of (160,000 sale price - 60,000 basis) $100,000, is allocated to Acre and the remaining gain of $60,000 is then shared equally by all of the partners.
The method used to depreciate partnership property is an election made by: a. The "principal partner." b. The partnership and may be any method approved by the IRS. c. The partnership and must be the same method used by the "principal partner." d. Each individual partner
Choice "b" is correct. Under entity theory, the partnership elects the depreciation method to be used and may use any method approved by the IRS.
Baker is a partner in BDT with a partnership basis of $60,000. BDT made a liquidating distribution of land with an adjusted basis of $75,000 and a fair market value of $40,000 to Baker. What amount of gain or loss should Baker report? a. $35,000 loss. b. $15,000 gain. c. $0 d. $20,000 loss.
Choice "c" is correct. In a complete liquidation of a partnership, a partner (Baker) recognizes gain only to the extent that the money received (if any) exceeds that partner's adjusted basis in the partnership immediately before the distribution. In this question, there is no money distributed, so there is no gain. The partner recognizes *loss* if only money, unrealized receivables, or inventory are received and if the basis of the assets received is less than the partner's basis in the partnership. In this question, there is no money, unrealized receivables, or inventory distributed, so there is no loss, regardless of the partner's basis in the partnership. Even though the land has a $40,000 fair market value, Baker's basis in the land is his $60,000 partnership basis, effectively giving him a $20,000 built-in loss that he can recognize by selling the land.
The CSU partnership distributed to each partner cash of $4,000, inventory with a basis of $4,000 and a fair market value (FMV) of $6,000, and land with an adjusted basis of $5,000 and an FMV of $3,000 in a liquidating distribution. Partner Chang had an outside basis in Chang's partnership interest of $12,000. In the second year after receiving the liquidating distribution, Chang sold the inventory for $5,000 and the land for $3,000. What income must Chang report upon the sale of these assets? a. $0 gain or loss. b. $0 ordinary gain and $1,000 capital loss. *c. $1,000 ordinary gain and $1,000 capital loss.* d. $1,000 ordinary gain and $0 capital loss.
Choice "c" is correct. In this liquidating distribution of a partnership, three different assets are distributed. The $4,000 cash distributed reduces Chang's (outside) basis in the partnership to $8,000. At that point, Chang's outside basis is less than the total (inside) basis of the remaining property distributed. The inventory gets $4,000 of basis first and Chang's outside basis is reduced to $4,000. The land gets the remaining $4,000 basis (whatever is left over). Basis: $12,000 Cash: (4000) =8000 remaining basis (4000) inventory =4000 remaining basis Land= 4000 basis even though basis is 5000 because it is limited to our basis The sale of the inventory for $5,000 then produces a $1,000 ordinary gain ($5,000 - $4,000), and the sale of the land for $3,000 produces a $1,000 capital loss ($3,000 - $4,000). Inventory is *ordinary* gain and NOT a capital gain because: Any Gain that represents partner's share of "Hot Assets" is treated as "Ordinary Income" as if cash were taken. Hot assets Appreciated Inventory (if Exchanged for Cash)
The individual partner rather than the partnership makes which of the following elections? a. Code Section 179 deductions for tangible personal property. b. Election to amortize organizational costs. c. Nonrecognition treatment for involuntary conversion gains. d. Whether to take a deduction or credit for taxes paid to foreign countries.
Choice "d" is correct. Most elections that affect the calculation of taxable income of a partnership are made by the partnership itself rather than by an individual partner. For example, the elections as to methods of accounting, methods of depreciation and the Section 179 expensing of a limited amount of depreciable property, the election not to use installment method accounting, and similar elections are made by the partnership and apply to all partners. However, individual partners can make the election to take a deduction or a credit for taxes paid to foreign countries.
Gain/loss recognition in a liquidating property distribution
Complete liquidation - no money distributed - no gain. Loss if money, unrealized receivables, or inventory are received and if the basis of the assets received is less than the partner's basis is the partnership.
Jones and Curry formed Major Partnership as equal partners by contributing the assets below: *Asset* *Adj Basis* *FMV* Jones Cash $45,000 $45,000 Curry Land $30,000 $57,000 The land was held by Curry as a capital asset, subject to a $12,000 mortgage, that was assumed by Major. What was Curry's initial basis in the partnership interest? A. $45,000 B. $30,000 *C. $24,000* D. $18,000 What was Jones' initial basis in the partnership interest? *A. $51,000* B. $39,000 C. $33,000 D. $45,000
Curry's initial basis in the partnership is Curry's adjusted basis in the property contributed ($30,000) less the mortgage assumed by the other partner (50% x $12,000), or $30,000 -$6,000 = $24,000. Land: *30,000* Share of partnership liabilities assumed by other partners $12,000 x .5 *(6000)* Net total: *$41,000* Curry's basis in his partnership interest is his transferred basis in the land of $30,000 reduced, but not below zero, by the portion of the mortgage that he is now relieved of because the partnership assumes his mortgage which is $6,000. Therefore, Curry's basis is $24,000. *The big picture is that Curry's adjusted basis in the land before the transfer to the partnership already includes the full $12,000 liability, i.e., the $30,000 includes the $12,000 mortgage. So we would subtract half of it and allow the other half to increase the other partners basis* When he contributes the land to the partnership, he is relieved of the entire $12,000 and then assumes $6,000 because he is a 50% partner in Major's profits and liabilities. Thus the net effect on Curry's basis in the land is a reduction of $6,000 and must reduce his basis. ===== Jones Cash adj basis= $45,000 + $6,000 his share of mortgage= $51,000 basis in partnership
Exception to the general rule
Exception to the general rule (the exception does not apply to the facts set forth in the question): Gain is recognized only to the extent that cash (including the partner's share of partnership liabilities are assumed by other partners) distributed exceeds the adjusted basis of the partner's interest in the partnership immediately before the distribution.
ABC Partnership distributed property to Anne, a partner, in a nonliquidating transfer. No money was distributed to Anne during the year, the property was in the partnership for over five years, and no debt was attached to the property. Anne had a basis in her partnership interest of $10,000. The partnership had AB of $20,000 in the property distributed to Anne. Which of the following are the tax consequences to Anne? a. $10,000 gain, basis in the partnership is reduced to $0, and basis in the property received is $20,000. b. $0 gain, basis in the partnership is reduced to $0, and basis in the property received is $10,000.
In this question, the partner received no cash, and the partner's share of partnership liabilities did not change. So, the partner will recognize no gain with respect to the distribution. Although the partnership's adjusted basis in the distributed property was $20,000, because the partner's basis in the partner's partnership interest was only $10,000, the adjusted basis of the property which the partner received will be limited to $10,000. The new basis in the partnership interest will be reduced from $10,000 to -0-.
Loss recognized when own more thatn 50% interest in the partnership
Losses realized on transactions between a partnership and a partner owning more than a 50% interest are NOT deductible as the parties would be considered *related* and any loss realized would be *disallowed*
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? a. $65,000 b. $80,000 c. $0 d. $50,000
RULE: Generally, no gain or loss is recognized on the contribution of property to a partnership in return for a partnership interest. The basis of the partnership interest is the basis of the property in the hands of the partner upon contribution. The partnership takes on the contributor's basis of the contributed property; however, if the fair market value of the property differs from the basis, the amount of the unrealized gain or loss at the date of contribution is specially allocated to the contributing partner upon the sale of that contributed property. Choice "d" is correct. Per the above rule, Marcus' basis in the partnership immediately after formation is $50,000, which is Marcus' basis in the land at the date of contribution.
Losses are disallowed on sales between related parties
Related includes brothers and sisters, husband-wife, lineal descendants (father, son, grandfather), and entities that are more than 50% owned by individuals, corporations, trusts and/or partnerships
Mom and Pop Partnership had the following results during the taxable year: Income from operations $100,000 loss Capital gain from sale of land 25,000 Charitable contributions 10,000 Junior, a *50% partner*, had an adjusted basis of $40,000 at December 31, without regard to the current year income or loss items. In preparing his individual income tax return, Junior should report which of the following amounts?
The deduction of the ordinary loss is limited to Junior's basis and any at risk amounts. Capital gain from sale of land 25,000 x 50%= $12,500 Charitable contributions 10,000 x 50% = $5,000 Junior's basis is calculated as $40,000 + $12,500 capital gain - $5,000 charitable contributions = $47,500; *thus the ordinary loss deducted on his return would be limited to $47,500.* *Cap gain = 12500* *Charitable contribution = 5000* The loss, capital gain, and charitable contributions are all stated separately - income from operations is passed through as a net number to the partners and charitable contributions and capital gain are separately stated items, not netted in that figure.
Partnership basis - special allocation Treatment of contributed appreciated property (built-in G/L)
When a partner contributes a property with FMV greater/lower than the property's AB (NBV), a built-in G/L exists at the date of contribution. Upon subsequent sale of that property, the "built-in" G or L that existed at the date of the contribution must be specially allocated to the contributing partner