FORMATION & BASIS- Partnership

How are distributions from a partnership treated?

Distributions are, in turn, treated as a return of capital. The distinction between partnerships and corporations is important because no tax is imposed on partnerships.

What is a partner's basis in a partnership immediately after formation?

Substituted basis from the assets contributed to the partnership

What items increase a partner's basis in a partnership?

1) Contributions of property 2) Proportionate share of income, including gains and exempt income 3) Proportionate share of increases in liabilities

What items decrease a partner's basis in a partnership?

1) Distributions 2) Proportionate share of expenses, including deductions, losses, and nondeductible expenses 3) Proportionate share of decreases in liabilities

What are the tax consequences of a partnership formation?

1) Generally recognize no gain or loss on contributions 2) No control club requirement 3) Must recognize income for partnership interest received for services equal to the value of the partnership interest received

What are the (3) ways in which a partnership REQUIRED tax year is determined?

1) Partnerships use the same year-end as its majority interest partner(s) (more than 50% capital and P&L). 2) If the partnership has no single year for the majority, then the partnership uses same year-end as all of its principal partners (5% P&L interest or more). 3) If neither the majority interest nor principal partner test is met, the required tax year is determined by using the least aggregate deferral method. This method is computationally intensive, but determines the year-end which will provide the least amount of deferral for the entire partnership group.

How are partnerships recognized?

A business operated as a partnership is not recognized as a taxable entity under the income tax laws. Instead, the partners divide the income and expenses of the business and report their share on individual returns. The income is taxed to the owners regardless of distributions.

How is a partner's basis in the partnership adjusted?

A partner's basis for the partnership is adjusted in the following order: (1) increased for all income items (including tax-exempt income); (2) decreased for distributions; and (3) decreased by deductions and losses (including nondeductible items not charged to capital).

What is the rule surrounding negative basis for a partner?

A partner's basis in the partnership cannot be reduced below zero. If the net change in basis in the partnership interest due to debt being assumed by the partnership exceeds the total basis of the assets contributed, the partner must recognize gain equal to that excess to prevent negative basis from occurring.

What is a Partnership?

An association of two or more taxpayers to operate a business that is not taxed as a corporation.

When are partnership returns due?

Beginning in 2016, partnership returns are due on or before the 15th day of the third month following the year-end. Partnerships can extend their returns for six months from the due date, which is September 15 for calendar-year partnerships.

Using the carryover basis, what is a partnership's basis for contributed property?

Carryover basis -Adjusted basis of property in the hands of the partners

What is a role of a general partner in management, and for what is a general partner liable?

General partners can participate in management and have joint and several liability for the partnership's debts.

What is the alternative to using the partnership's Required tax year?

If a partnership does not want to use the required tax year, the partners can elect a fiscal year-end (with IRS permission) if there is a business purpose; a natural business year can also be used.

Computation of Basis of Partnership Interest

Increases—A partner's basis is increased by contributions of property, income, and increases in liabilities. A partner's proportionate share of income includes gains and exempt income. A partner's proportionate share includes increases in liabilities (treated like a contribution). Decreases—A partner's basis is decreased by distributions, expenses, and deemed distributions. A partner's proportionate share of expenses, including deductions, losses, and nondeductible expenses (not capital expenditures) A partner's proportionate share of decreases in liabilities (deemed distributions)

What is the role of a limited partner in management, and for what is a limited partner liable?

Limited partners cannot participate in management, and they are only liable up to their investment.

How are non-recourse debts treated in a partnership?

Non recourse debt is often allocated based on the partners' profit sharing ratios.

How are gains and losses treated on the formation of a partnership?

Partners and partnerships recognize no gain or loss on contributions in exchange for a partnership interest. NOTE: No deferral is available for contributions to a partnership in exchange for property—deferral is only available for exchanges of property for a partnership interest.