2120 Partnerships
dissolution of partnership (sale, death of partner)
- A partnership terminates when: o 1. All its operations are discontinued o At least 50 percent of the total interest in partnership capital profits is sold or exchanged within a 12 month period, including sale/exchange to another partner
filing requirements, due dates, penalties, audit notice requirements
- File form 1065 by 15th day of 3rd month - Extension 7004 can be filed by the regular due date. - Late filing penalty is $210 per month per partner - Late or insufficient payments also have P&I
Partners dealings with partnership (exchanging property, guaranteed payments)
- Guaranteed payments: o Payments made to partner that are determined without regard to partnership income. These payments are treated the same as if they were made to a person who is not a partner. (considered ordinary income to partner) o Guaranteed payments deducted on form 1065 as a business expense, and listed on schedule K/K-1 o The individual partners report guaranteed payments on 1040 Schedule E
Family Partnerships
- Members of a family can be partners, people only recognized as partners if one of these requirements are met: o 1. Capital is a material income-producing factor (substantial part of business comes from use of capital) o Or 2. The family members joined in good faith to conduct a business - If a family member receives a gift of capital interest in a partnership in which capital is a material income producing factor, restrictions apply: o 1. Donee's distributive share of partnership income is reduced by compensation for services the donor renders to partnership o 2. Donee's distributive share of partnership income
Contribution of property to the partnership
- No gain or loss is recognized when property is contributed to the partnership. - Contribution of a limited partnership interest in another partnership qualifies as a tax-free contribution of property. - Disguised Sale: a contribution of money to the partnership followed by a distribution of property is treated as a sale of property o Distribution would not have been made but for the contribution. o The partner's right to the distribution of property does not depend on the success of partnership operations.
disposition of partners interest
- Partnership Gain/loss calculated by the difference between the amount realized from the sale and the adjusted basis of the partner's interest in the partnership. If the selling partner is relieved of any partnership liabilities,
partnership formation (pship agreement, general vs limited partners, capital contributions)
- Partnership agreement includes the original agreement and any modifications - Partnership is either general or limited o Each partnership has at least one general partner (takes part in daily operations, and is personally responsible for the liabilities) o If partnership has at least one limited partner - is called a limited partnership
Partnership income, expenses, distributions, and flow through (self- employment income)
- Two or more people in business, contributing money, property, labor, business - Partners get a K-1 on 1065 for flowthrough income. All income passes through to partners, so only partners pay income tax (not the partnership)
Jane received a gift from her mother of a capital interest in a family partnership in which capital is a material income-producing factor. Which of the following statements is correct about the donee's distributive share of partnership income?
1. It must be figured by reducing the partnership income by reasonable compensation for services the donor renders to the partnership. 2. The donee's distributive share of partnership income attributable to donated capital must not be proportionately greater than the donor's distributive share attributable to the donor's capital.
Partnership Ordinary business income
Gross receipts plus partnership income, less: COGS, Wages, repairs/maintenance, bad debt, rent, taxes, interest, retirement plans, other deductions
guaranteed payments
Is a payment made to a partner for services rendered or for the use of capital. This is made without regard to partnership income. The guaranteed payment is the minimum distribution less the partner's distributive share. Guaranteed payments are deducted by the partnership (only the amounts above percentage of partnership income)
Archie sells his 50% interest in XYZ Partnership to Hal for $5,000 cash. His outside basis in the partnership is $3,500. The partnership has inventory and a capital asset with respect to basis of $6,000 and $2,000. The respective fair market values of the inventory and capital asset are $8,000 and $1,000. Archie should properly recognize:
Publication 541, page 11, provides that the sale or exchange of a partner's interest in a partnership usually results in capital gain or loss. In addition, gain or loss is the difference between the amount realized and the adjusted basis of the partner's interest in the partnership. If the selling partner is relieved of any partnership liabilities, that partner also must include the liability relief as part of the amount realized for his or her interest. If, however, a partner receives money or property in exchange for any part of a partnership interest, the amount due to his or her share of the partnership's unrealized receivables or inventory items results in ordinary income or loss. This amount is treated as if it were received for the sale or exchange of property that is not a capital asset. ....... In this case, Archie has a gain of $1,500 ($5,000 − $3,500) from the sale of his 50% interest in the partnership. The treatment of the gain, however, is $1,000 ordinary income (($8,000 − $6,000) × 0.50), which is attributable to the inventory, and therefore a $500 capital gain ($1,500 less $1,000), which is attributable to the capital investment.
Under a partnership agreement, June is to receive 40% of the partnership income but not less than $12,000 a year. The partnership has net income of $20,000. What is the guaranteed payment that the partnership can deduct in figuring its ordinary income on page 1 of Form 1065?
Publication 541, page 7, discusses the treatment of minimum payments. If a partner is to receive a minimum payment from the partnership, the guaranteed payment is the amount by which the minimum payment is more than the partner's distributive share of the partnership income before taking into account the guaranteed payment. The partnership is able to deduct $4,000 of the $12,000 as a guaranteed payment to June. The $4,000 is the difference between June's minimum payment of $12,000 and her distributive share of the partnership income of $8,000 (40% of $20,000).Publication 541, page 7
Upon the receipt of a distribution, a retiring partner or successor in interest of a deceased partner will recognize:
The rules on a gain or loss on a distribution to a retiring partner are found on page 13 of Publication 541. Upon the receipt of the distribution, the retiring partner or successor in interest of a deceased partner will recognize gain only to the extent that any money (and marketable securities treated as money) distributed is more than the partner's adjusted basis in the partnership. The partner will recognize a loss only if the distribution is in money, unrealized receivables, and inventory items. No loss is recognized if any other property is received.Publication 541, page 13
Partnership
an unincorporated organization with 2 or more members, or a domestic LLC with two members or more (classified as partnership)... pship unless elects to be taxed as corporation
Partners distributive share of partnership loss
distributive share of partnership loss is allowed only to the extent of the adjusted basis of the partner's partnership interest...... if the loss is greater than the partnership basis, then the excess is not deductible for that year, but can be deducted in future years if the partner acquires basis.
Partnership 1065 due date
due 15th day of 3rd month following close of fiscal year, or March 15th
limited partner
has no recourse liabilities and no obligation to contribution additional capital........A limited partner generally has no obligation to contribute additional capital to the partnership and therefore does not have economic risk of loss in partnership recourse liabilities. a limited partner generally does not have a share of partnership recourse liabilities.
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?
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. In this case, the partnership would have a basis in the property of $112,000, which is the sum of $100,000 (adjusted basis) and $12,000 (recognized gain by Melissa).
If the partner's distributive share of a partnership item cannot be determined under the partnership agreement, it is determined by his or her interest in the partnership. The partnership interest is determined by taking into account all of the following items, except:
if the partnership agreement does not provide for the partner's share of income, gain, loss, deduction, or credit, or if the allocation does not have substantial economic effect, the partner's distributive share of the partnership items is generally determined by the partner's interest in the partnership....................the partner's interest is determined by taking into account all of the following items: the partners' relative contributions to the partnership, the interests of the partners in economic profits and losses (if different from interests in taxable income or loss) and in cash flow and other nonliquidating distributions, and the rights of the partners to distributions of capital upon liquidation. The partner's interest does not include the amount of the partnership's nonrecourse liabilities. These liabilities do not have any economic effect because the partner does not bear the economic burden corresponding to that allocation.
partnership deductions not allowed
items separately stated, and not included as deductions: net income or loss from the trade or business, net income or loss from other real estate or rental activity, sec 179 depreciation, gains and losses from sales of property
Partnership tax year
must conform to it's partners tax years. Tax year is determined by majority members tax years, if no majority then use the tax year for principal partners (5% or more ownership) or tax year with least aggregated deferral income to the partners
basis of partners interest
o Beginning basis is sum of money contributed to the partnership and adj/ basis of other property contributed. o Contributions of property to partnership do not recognize gain or loss o Annual adjustments to basis are required, to prevent double taxation
sale or exchange of partnership interest
sale or exchange of partnership interest results in capital gain or loss, gain or loss is amount realized vs adjusted basis of partners interest, including any amount relieved from any partnership liabilities...........if a partner receives money or property in exchange for partnership interest, they have ordinary income or loss
Abercrombie Partnership sold a capital asset to Freeman Partnership at a loss of $50,000. Abercrombie had held the property for 5 months. Abercrombie is owned 30% by Doug, 30% by Fred, and 40% by Dale, Doug's brother. Freeman Partnership is owned 80% by ABC Corporation. Doug owns 25% of the stock of ABC Corporation and Dale's daughter, Deb, owns 60% of the stock of ABC Corporation. How much of the loss should Abercrombie allow for tax purposes on their tax return for the year of the sale?
special rules applying to a sale or exchange of property between a partnership and certain persons. In the case of a loss, the losses will not be allowed from a sale or exchange of property (other than some interest in the partnership) directly or indirectly between a partnership and a person whose direct or indirect interest in the capital or profits of the partnership is more than 50%.If the sale or exchange is between two partnerships in which the same persons directly or indirectly own more than 50% of the capital or profits interests in each partnership, no deduction of a loss is allowed. Dale owns 70% of the Abercrombie partnership (40% Dale and 30% Doug, Dale's brother) and 68% of the Freeman partnership (80% of (25% Doug and 60% of Deb, Dale's daughter)). Hence, the transfer of the property from Abercrombie to Freeman at a $50,000 loss cannot be taken by Abercrombie or, in other words, recognized.
Sale of partnership asset
special rules between related party. Related parties are family members, partnership owned by individuals totaling>50%, partnerships that are more than 50% of one individual............if a transaction occurs between deemed related parties, losses are disallowed. When property is sold to an unrelated party, only the gain is realized that is greater than previously disallowed losses
Partners basis in a partnership
the basis of a partner in a partnership is equal to: the money and the adjusted basis of property the partner contributes............. partner basis is increased by: any additional contributions, the assumption of partnership liabilities, partner distributive share of taxable and nontaxable partnership income, and the partners distributive share of the excess of the deductions for depletion over the basis of the depletable property
An individual is considered as owning the partnership interest that is directly or indirectly owned by, or for, his or her family. Which of the following is considered to be family?
the following rules apply to determine if there is more than 50% ownership in partnership capital or profits: An interest directly or indirectly owned by, or for, a corporation, partnership, estate, or trust is considered to be owned proportionately by, or for, its shareholders, partners, or beneficiaries. An individual is considered to own the interest directly or indirectly owned by, or for, the individual's family. For this rule, "family" includes only brothers, sisters, half-brothers, half-sisters, spouses, ancestors, and lineal descendants.
