REG - Ch 14 - Partnerships
B) $101,000 A partnership's ordinary income is the balance of the taxable income of a partnership that is not required to be separately stated. Deductible guaranteed payments are not separately stated. Charitable contributions are separately stated. Book Income + Charitable Contributions = Partnership ordinary income 100,000 + 1,000 = 101,000
Dunn and Shaw are partners who share profits and losses equally. In the computation of the partnership's 2020 book income of $100,000, guaranteed payments to partners totaling $60,000 and charitable contributions totaling $1,000 were treated as expenses. What amount should be reported as ordinary income on the partnership's 2020 return? A) $100,000 B) $101,000 C) $160,000 D) $161,000
C) A January 31 year end if it is a retail enterprise with a natural business year ending January 31 and all of its majority and principal partners are on a calendar year. A partnership's required taxable year is that of the partner(s) owning more than 50% of partnership capital and profits if they have the same tax year on the first day of the partnership's tax year. If the majority partner(s) do not have the same taxable year or have not kept their same tax year for the required period, the taxable year of all principal (5%) partners must be adopted. If all principal partners do not have the same taxable year, the least aggregate deferral year end must be used. A newly formed partnership may elect a fiscal year with no more than a 3-month deferral period (i.e., the number of months between the beginning of the tax year selected and the end of the required tax year). A January 31 year end has an 11-month deferral period. Any other fiscal year may be chosen only with the consent of the IRS and only if a business purpose (e.g., natural business year) is established.
In the current year, which taxable year may a newly formed partnership not adopt without obtaining prior approval from the IRS? A) A taxable year that is the same as that of its majority partners. B) A least aggregate deferral year end if majority partners and principal partners have varied year ends. C) A January 31 year end if it is a retail enterprise with a natural business year ending January 31 and all of its majority and principal partners are on a calendar year. D) The taxable year of all its principal partners if its majority partners do not have a common tax year end.
D) $30,000 Arch's 75% share of the partnership's $40,000 ordinary income, or $30,000, is Arch's share of taxable income for 2020 even if not distributed. Distributions are received free of tax by the partner, provided (s)he has adequate basis in the partnership, i.e., at least as much basis as the distribution. A partner's basis is increased by his or her share of partnership income and decreased by distributions.
On January 2, 2020, Arch and Bean contribute cash equally to form the JK Partnership. Arch and Bean share profits and losses in a ratio of 75% to 25%, respectively. For 2020, the partnership's ordinary income was $40,000. A distribution of $5,000 was made to Arch during 2020. What is Arch's share of taxable income for 2020? A) $5,000 B) $10,000 C) $20,000 D) $30,000
C) $10,000 ordinary income. An individual recognizes compensation as ordinary income when a partnership interest is received in exchange for services (current or past) rendered. The receipt of a capital interest in a partnership for services is included in the year of receipt. Income recognized is the $10,000 (10% × $100,000) FMV of the partnership interest received unless the interest is nontransferable or subject to a substantial risk of forfeiture.
On June 1, 2020, 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 2020 income tax return, what amount must Kelly include as income from transfer of partnership interest? A) $7,000 ordinary income. B) $7,000 capital gain. C) $10,000 ordinary income. D) $10,000 capital gain.
A) $0 A partner's basis in a partnership equals the adjusted basis of the property contributed plus the partner's share of all partnership liabilities minus any liability of the partner assumed by the partnership. A liability assumed by the partnership is treated as a distribution to the partner. The basis of this partnership interest is the basis of the contributed land ($16,000) reduced by the liability assumed by the partnership ($24,000) and increased by the partner's share of recourse partnership liabilities ($6,000 = $24,000 × 0.25) and recognized gain on contributed property ($2,000). Thus, the basis will be $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 recourse 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
B) Unrealized receivables. A sale or exchange of a partnership interest results in capital gain or loss, except that any gain realized attributable to "hot assets" is ordinary income. "Hot assets" include unrealized receivables and inventory.
"Hot assets" of a partnership would include which of the following? A) Cash. B) Unrealized receivables. C) Section 1231 assets. D) Capital assets.
C) Increases each partner's basis in proportion to their ownership. A partner's share of a partnership liability is treated as if the partner contributed an equivalent amount of money to the partnership. The deemed contribution increases the partner's basis in his or her partnership interest. Normally, general partners share liabilities based on their ratio for sharing economic losses (recourse liability).
A $100,000 increase in partnership liabilities is treated in which of the following ways? A) Increases each partner's basis in the partnership by $100,000. B) Increases the partners' bases only if the liability is nonrecourse. C) Increases each partner's basis in proportion to their ownership. D) Does not change any partner's basis in the partnership regardless of whether the liabilities are recourse or nonrecourse.
A) I only. A guaranteed payment is a payment to a partner that is determined without regard to the partnership income. These payments can be in addition to regular profit shares and are deductible by the partnership.
A guaranteed payment by a partnership to a partner for services rendered may include an agreement to pay I. A salary of $5,000 monthly without regard to partnership income II. A 25% interest in partnership profits A) I only. B) II only. C) Both I and II. D) Neither I nor II.
C) $100,000 Under Sec. 723, the partnership's basis in property is the contributing partner's basis at the time of contribution. Therefore, the partnership's basis in the building is A's adjusted basis of $100,000. No adjustment in basis of the building is made for the mortgage.
A, B, and C formed a calendar-year partnership. Profits and losses are to be shared equally. A contributed a building to be used in the business that had an adjusted basis to A of $100,000 and a fair market value of $130,000. The partnership also assumed A's $60,000 mortgage on the building. B and C each contributed $40,000 in cash to the partnership's capital. What is the partnership's basis for determining depreciation on the building? A) $0 B) $40,000 C) $100,000 D) $130,000
D) $20,000 A special allocation for the difference between fair market value at the time of contribution and basis of contributed property is required. The gain attributable to the precontribution appreciation in the securities must be allocated entirely to Todd, and the gain attributable to postcontribution appreciation should be shared equally by Burns, Cooper, and Todd. Todd's share is Precontribution gain + 1/3 of postcontribution gain = Todd's share (50,000 FMV - 35,000 basis) + (65,000 proceeds - 50,000 1/1/19 FMV) = 20,000 Todd's share of capital gain
At December 31, 2019, Burns and Cooper were equal partners in a partnership with net assets having a tax basis and fair market value of $100,000. On January 1, 2020, Todd contributed securities with a fair market value of $50,000 (purchased in 2018 at a cost of $35,000) to become an equal partner in the new firm of Burns, Cooper, and Todd. The securities were sold on December 15, 2020, for $65,000. How much of the partnership's capital gain from the sale of these securities should be allocated to Todd? A) $5,000 B) $10,000 C) $15,000 D) $20,000
C) Decreased by $17,500. A decrease in a partner's share of partnership liabilities is treated as a distribution of money to the partner. At the beginning of the year, Paul's 25% share of the $150,000 of partnership liabilities was $37,500. At the end of the year, Paul's 20% share of the $100,000 of partnership liabilities was $20,000. Thus, Paul's share of partnership liabilities decreased by $17,500 ($37,500 - $20,000), and his basis was reduced by the same amount.
At the beginning of 2020, Paul owned a 25% interest in Associates Partnership. During the year, a new partner was admitted, and Paul's interest was reduced to 20%. The partnership liabilities at January 1, 2020, were $150,000 but decreased to $100,000 at December 31, 2020. Paul's and the other partners' capital accounts are in proportion to their respective interests. Disregarding any income, loss, or drawings for 2020, the basis of Paul's partnership interest at December 31, 2020, compared to the basis of his interest at January 1, 2020, was A) Decreased by $37,500. B) Increased by $20,000. C) Decreased by $17,500. D) Decreased by $5,000.
A) Increased. A partner's share of a partnership liability is treated as if the partner contributed an equivalent amount of money to the partnership. The deemed contribution increases the partner's basis in his or her partnership interest. Normally, general partners share liabilities based on their ratio for sharing economic losses (recourse liability) or partnership profits (nonrecourse liability).
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 A) Increased. B) Decreased. C) Unaffected. D) Dependent on each partner's ability to meet the obligation if called upon to do so.
B) $34,000 The adjusted basis of a partner's interest is the original basis, increased by the partner's distributive share of income of the partnership and decreased by the partner's distributive share of losses and distributions received from the partnership. Lewis's tax basis is Lewis' tax basis on 1/1/20 + share of income + share of loss = Lewis' tax basis on 12/31/20 18,000 + (50,000 * 40%) - (10,000 * 40%) = 34,000 tax basis 12/31/20
Clark and Lewis share profits and losses of 60% and 40%, respectively. The tax basis of each partner's interest in the partnership as of December 31, 2019, was as follows: Clark $24,000 Lewis $18,000 During 2020, the partnership had ordinary income of $50,000 and a long-term capital loss of $10,000 from the sale of securities. There were no distributions to the partners during 2020. What is the amount of Lewis's tax basis as of December 31, 2020? A) $44,000 B) $34,000 C) $38,000 D) $42,000
A) $37,500 A partner will report the ownership portion of the partnership income. Partnership income is the balance of the taxable income of a partnership that is not required to be separately stated. Capital gains and losses are generally segregated from ordinary net income and carried into the income of the individual partners. Any guaranteed payment (GP), while deductible for the partnership, is included in gross income of the receiving partner. Reportable income is calculated as follows: Business income pre-GP - GP = reportable partnership income 80,000 - 20,000 = 60,000 25% interest = 60,000 * .25 = 15,000 + Guaranteed Payment 20,000 + 25% capital gain 2,500 = Total Income 37,500
Evan, a 25% partner in Vista Partnership, received a $20,000 guaranteed payment in 2020 for deductible services rendered to the partnership. Guaranteed payments were not made to any other partner. Vista's 2020 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 2020 tax return? A) $37,500 B) $27,500 C) $22,500 D) $20,000
B) $40,000 Kline's basis in the partnership is equal to the adjusted basis of the property contributed minus liability relief plus his $5,000 share of partnership liabilities (50% × $10,000). Therefore, he will have an initial basis of $40,000 ($45,000 adjusted basis - $10,000 liability relief + $5,000 share of the partnership liability).
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? A) $35,000 B) $40,000 C) $45,000 D) $60,000
D) $6,000 loss. Generally, neither the partnership nor any partner recognizes gain or loss when property is contributed in exchange for a partnership interest. The partnership's basis in the property is $15,000 (the contributing partner's basis at the time of contribution). The sale of the property by the partnership resulted in a $7,000 loss ($8,000 proceeds less $15,000 AB). Precontribution loss must be allocated to the contributing partner. Jim must recognize all of the precontribution loss of $5,000 ($15,000 basis - $10,000 FMV contribution) plus his $1,000 share of postcontribution loss [($10,000 FMV of contribution - $8,000 sales price) × 1/2].
Last year, Jim, one of two equal partners, contributed land with a basis to him of $15,000 and a fair market value of $10,000 to the partnership of which he was a member. His capital account was credited for $10,000. The land was later sold for $8,000. As a result of this sale, Jim must report on his personal income tax return A) $1,000 loss. B) $3,500 loss. C) $5,000 loss. D) $6,000 loss.
B) $61,000 A partner's initial basis in the partnership interest received is equal to any cash contribution made. The basis of a partner's interest in a partnership is adjusted up for allocable share of partnership taxable income and increases in the partner's share of partnership liabilities and adjusted down for distributions from the partnership to the partner. Molloy's basis at year end is $61,000 ($40,000 initial basis + $20,000 taxable income - $5,000 distribution + $6,000 liability assumed).
Molloy contributed $40,000 in cash in exchange for a one-third 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, had a one-third share in the $18,000 of partnership recourse liabilities. What was Molloy's basis in RST at year end? A) $55,000 B) $61,000 C) $71,000 D) $101,000
B) $35,000 Each partnership item of income, gain, deduction, loss, or credit that may vary the tax liability of any partner must be separately stated. Items that must be separately stated include the following: Section 1231 gains and loss Net short- and long-term capital gain or loss from the sale or exchange of capital assets Investment income and related expenses Charitable contributions Guaranteed payments made to a partner are listed as a separate line item on the partner's K-1 form because they are ordinary income to that partner. However, when calculating non-separately stated income of the partnership, total guaranteed payments are deducted from ordinary income of the partnership. Thus, the total that PDK would report as non-separately stated income would be $35,000 ($120,000 revenues - $36,000 salaries - $10,000 guaranteed payments - $21,000 rent expense - $18,000 depreciation expense).
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 non-separately stated income for Year 1 tax purposes? A) $30,000 B) $35,000 C) $43,000 D) $51,000
B) II only. For purposes of determining the partner's gross income, the guaranteed payment (GP) is treated as made to a nonpartner. The partner separately states the GP from any distributive share. The payment is ordinary income to the partner.
Peterson has a one-third interest in the Spano Partnership. During 2020, Peterson received a $16,000 guaranteed payment, which was deductible by the partnership, for services rendered to Spano. Spano reported a 2020 operating loss of $70,000 before the guaranteed payment. What, if any, are the net effects of the guaranteed payment? I. The guaranteed payment increases Peterson's tax basis in Spano by $16,000. II. The guaranteed payment increases Peterson's ordinary income by $16,000. A) I only. B) II only. C) Both I and II. D) Neither I nor II.
C) The partner's holding period of the capital asset began. The holding period of the partner's interest includes the holding period of contributed capital and Sec. 1231 assets. The holding period on an interest acquired in exchange for money, ordinary income property, or services begins the day after the exchange.
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 transfers the asset to the partnership. C) The partner's holding period of the capital asset began. D) The partner is first credited with the proportionate share of partnership capital.
B) Includes the period during which the property was held by the contributing partner. The partnership's holding period for contributed property includes the period of time the property was held by the contributing partner. The holding period of the partner "tacks on" because the partnership receives a carryover basis in the contributed property. This is true even if the contributing partner recognizes a gain or loss (due to being relieved of debt in excess of basis).
The holding period of property acquired by a partnership as a contribution to the contributing partner's capital account A) Begins with the date of contribution to the partnership. B) Includes the period during which the property was held by the contributing partner. C) Is equal to the contributing partner's holding period prior to contribution to the partnership. D) Depends on the character of the property transferred.
C) Services or the use of capital without regard to partnership income. Guaranteed payments are payments to a partner for services or for the use of capital which are determined without regard to the income of the partnership.
Under the Internal Revenue Code sections pertaining to partnerships, guaranteed payments are payments to partners for A) Payments of principal on secured notes honored at maturity. B) Timely payments of periodic interest on bona fide loans that are not treated as partners' capital. C) Services or the use of capital without regard to partnership income. D) Sales of partners' assets to the partnership at guaranteed amounts regardless of market values.
D) Yes//Yes The purchasing partner's basis in his or her partnership interest is its cost basis. It includes both cash paid the seller and the purchaser's allocable share of partnership liabilities. But the partnership's basis in partnership property is not adjusted when a partnership interest is transferred unless a Sec. 754 election is in effect.
Which of the following should be used in computing the basis of a partner's interest acquired from another partner? Cash Paid by Transferee to Transferor//Transferee's Share of Partnership Liabilities A) No//Yes B) Yes//No C) No//No D) Yes//Yes