Ch 20 Forming & Operating Partnership, Tax 332 Chapter 20, ACCT 4343-Tax of Business Ch.9
Which of the following BEST describes a guaranteed payment? a) A payment made by a partnership to a partner whether the partnership generates income or losses b) A payment from the partner to the partnership that is a required contribution per the partnership agreement c) A payment by the partnership to a third-party creditor (like a bank) that has received a personal guarantee by a partner
a) A payment made by a partnership to a partner whether the partnership generates income or losses
Bunny provides deductible consulting services to Egg Partnership and receives a capital interest with a liquidation value of $50,000 (no profits interest). What is the tax treatment to Bunny and to Egg?
$50,000 ordinary income to Bunny and $50,000 deduction to Egg
Leann has basis in her partnership interest of $7,000 and an at-risk amount of $4,000 at year-end before considering the partnership ordinary loss of ($10,000). Leann does NOT materially participate in the partnership activities. Leann has passive income of $5,000 from her other passive activities and $10,000 of wages and salaries income. How much of Leann's loss is suspended due to at-risk and tax basis limitations, combined?
$6,000
Eddie contributed $60,000 cash to Howling LLC in exchange for a 50% member interest. Howling immediately borrowed $50,000 of nonrecourse debt. What is Eddie's tax basis in Howling?
$85,000 basis includes his cash contribution plus $25,000 (50% x 50,000 non recourse debt)
Eddie contributed $60,000 cash to Howling Partnership in exchange for a 50% partnership interest. Howling immediately borrowed $50,000 of debt that Eddie and the other partners had to guarantee personally based on their initial ownership interests. What is Eddie's tax basis in Howling? $60,000 $110,000 $85,000
$85,000 Reason: Eddie adds his $60,000 contribution of cash + $25,000 (50% of the partnership's debt that he is personally liable for) = $85,000.
Eddie contributed $60,000 cash to Howling Partnership in exchange for a 50% partnership interest. Howling immediately borrowed $50,000 of debt that Eddie and the other partners had to guarantee personally based on their initial ownership interests. What is Eddie's tax basis in Howling? $110,000 $60,000 $85,000
$85,000 Reason: Eddie adds his $60,000 contribution of cash + $25,000 (50% of the partnership's debt that he is personally liable for)
During the current year, Jason received guaranteed payments of $12,000, $1,000 and $0 from his ownership interest in a partnership (he is a general partner), an LLC, and a limited partnership (he is a limited partner), respectively. The partnership, LLC, and limited partnership also allocated ordinary income (loss) to Jason of ($4,000), $2,000, and $6,000, respectively. Assuming Jason provided limited services to the LLC but is NOT involved in the management, what is Jason's self-employment income/loss for the current year?
$9,000 $13,000 - $4,000 = $9,000
Victoria contributes cash of $20,000 in exchange for a partnership interest. In the first year, her share of dividends, tax-exempt income and ordinary business loss are $2,000, $1,000 and ($4,000), respectively. The partnership also makes a cash distribution to her of $10,000. What is Victoria's adjusted basis at the end of the year? $6,000 $9,000 $20,000 $19,000
$9,000 Reason: $20,000 + $2,000 + $1,000 - $10,000 - $4,000 = $9,000
Which of the following are generally flow-through entities? (Check all that apply.)
- S corporation - Limited partnership - Limited liability company
Partnership allocations of income and loss should: (Check all that apply.)
- be defined in the partnership agreement. - have substantial economic effect.
Miguel received a guaranteed payment of $14,000 from Yorba Linda Partnership, a business partnership in which he is a general partner. In addition, he was allocated $18,000 of ordinary business income from Yorba Linda. Miguel also has an ownership interest in Calexico LLC. Calexico paid Miguel a guaranteed payment of $3,000 and allocated $0 of ordinary business income to Miguel. How much self-employment income does Miguel have in total from Yorba Linda and Calexico?
$35,000
Which one of the following actions could increase a partner's basis in the partnership, allowing that partner to deduct additional suspended losses?
Guaranteeing more partnership debt
Gandy is allocated a $10,000 passive loss from his investment in a partnership. Which of the following types of income can be offset by Gandy's passive losses?
Income from Gandy's investment in a limited partnership.
Consistent with other types of entities, partnerships with gross receipts exceeding a certain threshold must use the accrual method for the purchase and sale of __________
Inventory
Snap Inc. and Crackle Corp. own a capital and profits interest in the Cereal Bowl Partnership of 20% and 25%, respectively. There are another 35 partners, all with interests of less than 5%. Snap and Crackle have a June 30 year-end and the 35 other partners have various fiscal year ends. What year end must Cereal Bowl use?
June 30
Lawrence and Mohammed (50% partners) invited Frizz to join their partnership. Frizz provided services in exchange for a capital interest with a liquidation value of $10,000. What is the effect of this exchange on the tax basis of each partner?
Lawrence decreased by $5,000, Mohammed decreased by $5,000, Frizz increased by $10,000.
Which of the following are generally flow-through entities? (Check all that apply.) C corporation Limited liability company S corporation Limited partnership
Limited liability company S corporation Limited partnership
Which of the following are generally flow-through entities? (Check all that apply.) Limited liability company S corporation C corporation Limited partnership
Limited liability company S corporation Limited partnership
Duncan has land that he purchased 5 years ago and equipment that he purchased this month. He contributes both to the DoNut Partnership in exchange for a partnership interest. What is DoNut's holding period for each asset?
Long-term for the land and short-term for the equipment; the holding period for both assets carries over from the partner.
Billy contributes equipment used in a trade or business that he has held for more than 1 year to a partnership in exchange for a partnership interest. What is Billy's holding period immediately after the transfer and one year plus one day later?
Long-term immediately and long term after the year
Trixie (an individual), Speed Corp. and Pops, Inc. each own a capital and profits interest in Mock Five Partnership of 30%, 40% and 40%, respectively. Trixie has a calendar year-end, Speed has a May 31 year-end and Pops has an August 31 year-end. What year-end must Mock Five use
MAY 31 Reason: Under the least aggregate deferral method, a May year-end results in the least deferral.
Which of the following are recognized by the partner on the contribution of property to a partnership by a partner?
Neither built-in gains nor losses
Which of the following are recognized by the partner on the contribution of property to a partnership by a partner? built-in losses both built-in gains and losses neither built-in gains nor losses built-in gains
Neither built-in gains nor losses
Taylor Partnership is a general partnership with 3 equal partners. In the current year, Taylor generated taxable business income of $3,000 and made $0 distributions to its partners. How will the $3,000 be taxed for Federal income tax purposes?
No tax at the partnership level and all $3,000 taxed at the partner level.
Participants in activities are considered passive unless their involvement in the activity is (Check all that apply.)
Regular Substantial Continuous
Which of the following is NOT a possible loss limitation on partnership losses?
Self-employment tax limitation
Which of the following is NOT a possible loss limitation on partnership losses? Passive loss limitation Tax-basis limitation Excess business loss limitation At-risk limitation Self-employment tax limitation
Self-employment tax limitation Reason: There is a cap on the amount of self-employment income subject to the Social Security portion of FICA taxes, but no such limitation on partnership losses.
Profits interest received
Service partner does NOT immediately recognize ordinary income for value of partnership interest received
Capital interest received
Service partner recognizes ordinary income for the liquidation value of the partnership received
On January 1, 20X1, Glenda contributes $10,000 cash to the Ruby Partnership in exchange for a partnership interest. What is Glenda's holding period in her Ruby interest on February 1, 20X1?
Short-term
On January 1, 20X1, Glenda contributes $10,000 cash to the Ruby Partnership in exchange for a partnership interest. What is Glenda's holding period in her Ruby interest on February 1, 20X1? Short-term Partnership interests do not have a holding period Long-term
Short-term Reason: Only with the contribution of a capital asset or 1231 property does the holding period of the contribution tack on.
Duncan has land that he purchased 5 years ago and equipment that he purchased this month. The land was held as an investment and the equipment was personal-use. He contributes both to the DoNut Partnership for use in a new partnership business in exchange for a partnership interest. What is the character of the property to DoNut?
Since DoNut will be using the land and equipment in a trade or business, it will be ordinary and then 1231 after one year.
If a partnership has debt, the debt generally serves to increase the partner's outside basis. True False
TRUE
Which of the following are requirements to be classified as qualified nonrecourse financing? (Check all that apply.)
The creditor is NOT a related party The debt is secured by real property The creditor is a commercial lender
Newly formed Chasbro Partnership is preparing its first tax return. Who makes the election to expense a portion of the partnership's start-up costs?
The partnership
Contributions of property to a partnership generally result in the same type of deferral available to a sole shareholder's contribution of property to a corporation. True False
True
True or false: Partnerships are required to file tax returns even though they do NOT pay tax.
True
A partner that provides services to a partnership can receive ______ in exchange for his or her contribution of services.
both a capital and/or profits interest
Partnerships are taxed under:
both the entity and aggregate approach
Partnerships are taxed under: Solely the aggregate approach solely the entity approach both the entity and aggregate approach
both the entity and aggregate approach
A partnership interest represents a(n):
bundle of rights granted to partners through a partnership agreement
The right to receive a share of the partnership net assets if the partnership is liquidated is called a(n) interest.
capital
Entities taxed as partnerships track the equity of their owners using a(n) ____ ____ for each owner.
capital account
A partner's interest in a partnership interest is treated as a(n):
capital asset
A partner's interest in a partnership interest is treated as a(n): tax-exempt asset capital asset ordinary asset
capital asset
Brenda is entitled to a 10% share of the net assets of the GTC Partnership if it were to liquidate. Brenda's right can be described as:
capital interest
A partnership's basis in its own assets is known as the ___ basis.
inside
Consistent with other types of entities, partnerships with gross receipts exceeding a certain threshold must use the accrual method for the purchase and sale of ____ .
inventory
Consistent with other types of entities, partnerships with gross receipts exceeding a certain threshold must use the accrual method for the purchase and sale of ____.
inventory
The tax law relating to the selection of a tax year-end for partnerships generally requires the partnership to adopt a tax year with the
least aggregate deferral
A partner's basis in his or her partnership interest is known as ___ basis.
outside
A partner contributes property or services in exchange for the general ownership interest called a(n) ___ ___ .
partnership interest
Clark is preparing to contribute property with a value of $5,000 and basis of $20,000 to a partnership. A better tax alternative is to:
sell the property, recognize the loss and contribute the cash from the sale
Clark is preparing to contribute property with a value of $5,000 and basis of $20,000 to a partnership. A better tax alternative is to: transfer the property to the partnership in exchange for a partnership interest continue with the contribution. The built-in loss will NOT have to be recognized sell the property, recognize the loss and contribute the cash from the sale
sell the property, recognize the loss and contribute the cash from the sale
Guaranteed payments are
separately stated items and deducted from ordinary business income or loss.
A partner's tax basis in his or her partnership interest is increased by the:
tax basis of the property contributed
True or false: The basis amount and the at-risk amount of a partnership interest generally only differ by the amount of non-qualified nonrecourse financing.
true
Howell Partnership has two partners (each 50% interest), Al and Cal. Howell generated ordinary income of $20,000 this year, but only made a cash distribution of $10,000 to Al. Which of the following BEST describes the income that Al and Cal will recognize this year?
$10,000 income for Al; $10,000 income for Cal
Agatha contributes cash of $10,000 plus land valued at $25,000 (basis = $5,000) subject to a nonrecourse mortgage of $15,000 to the Kristy Partnership for a 50% interest. What is Agatha's outside basis in Kristy immediately after the contribution?
$12,500
Steven is a member in Manyou LLC. As part of his ownership in Manyou, he also personally guaranteed a portion of Manyou's debts and is considered the managing member of the company (basically he signs all the contracts and checks). Manyou paid Steven a guaranteed payment of $5,000 and allocated business loss of ($2,000) to him in the current year. What is Steven's self-employment income/loss from Manyou?
$3,000 $5,000 - $2,000 = $3,000.
Katie contributes property with a value of $40,000 and adjusted basis of $30,000 to the Parry Partnership in exchange for her partnership interest. Parry Partnership has no debt. What is Katie's basis in her partnership interest?
$30,000
Partnership income tax returns are due:
15th day of the 3rd month after year end
Billy contributes equipment used in a trade or business that he has held for more than 1 year to a partnership in exchange for a partnership interest. What is Billy's holding period immediately after the transfer and one year plus one day later? A) Long-term immediately and long term after the year B) Short-term immediately and long term after the year C) Short-term immediately and short-term after the year
A) Long-term immediately and long term after the year Reason: The holding period of the partnership interest tacks on the previous holding period of 1231 property contributed.
Partnership allocations of income and loss should: (Check all that apply.) A) be defined in the partnership agreement. B) follow share of capital interests. C) have substantial economic effect.
A and C
Which of the following BEST describes a guaranteed payment?
A payment made by a partnership to a partner whether the partnership generates income or losses
Which of the following is NOT a passive activity?
A rental real estate business in which the real estate developer works full time
Which of the following BEST describes a Form K-1?
A schedule prepared for each partner listing his or her individual share of the partnership's ordinary income/loss and separately stated items
Howell Partnership has two partners (each 50% interest), Al and Cal. Howell generated ordinary income of $20,000 this year, but only made a cash distribution of $10,000 to Al. Which of the following BEST describes the income that Al and Cal will recognize this year? A) $10,000 income for Al; $10,000 income for Cal B) $10,000 income for Al; $0 for Cal C) $5,000 income for Al; $5,000 income for Cal D) $0 income for Al; $0 income for Cal
A) $10,000 income for Al; $10,000 income for Cal Reason: Partners must recognize income whether they receive a distribution or not.
Newly formed Chasbro Partnership is preparing its first tax return. Who makes the election to expense a portion of the partnership's start-up costs? A) The partnership B) the partner with the earliest-year end C) The partner with the largest interest D) Any partner
A) The partnership
Which of the following is NOT a decrease to basis in a partnership interest?
An increase in the partner's share of the debt of the partnership
Bunny provides deductible consulting services to Egg Partnership and receives a capital interest with a liquidation value of $50,000 (no profits interest). What is the tax treatment to Bunny and to Egg? A) No income to Bunny and no deduction for Egg B) $50,000 ordinary income to Bunny and $50,000 deduction to Egg C) No income to Bunny, but a $50,000 deduction to Egg
B) $50,000 ordinary income to Bunny and $50,000 deduction to Egg Reason: A service partner recognizes ordinary income for a capital interest and the partnership receives a commensurate deduction.
Murtaugh decides he is ready to leave the LW Partnership and sells his interest (basis = $30,000) to Riggs for $75,000. Murtaugh was an original partner in LW when it was formed 5 years ago. LW has no debt. What is Rigg's basis and holding period in his newly acquired LW interest? A) Basis = $30,000; holding period begins at date of purchase B) Basis = $75,000; holding period begins at date of purchase C) Basis = $30,000; holding period carries over from previous partner
B) Basis = $75,000; holding period begins at date of purchase Reason: The basis of a purchased partnership interest is the cost + share of debt. The holding period begins on date of purchase.
Lawrence and Mohammed (50% partners) invited Frizz to join their partnership. Frizz provided services in exchange for a capital interest with a liquidation value of $10,000. What is the effect of this exchange on the tax basis of each partner? A) No effect on basis; Lawrence and Mohammed take a deduction for $5,000 each and Frizz recognizes $10,000 income. B) Lawrence decreased by $5,000, Mohammed decreased by $5,000, Frizz increased by $10,000. C) No effect on basis and no deductions or income.
B) Lawrence decreased by $5,000, Mohammed decreased by $5,000, Frizz increased by $10,000. Reason: By transferring $10,000 of capital interest to Frizz, Lawrence and Mohammed decrease their ownership by the same in total (50% each).
Brenda is entitled to a 10% share of the net assets of the GTC Partnership if it were to liquidate. Brenda's right can be described as: A) stock interest B) capital interest C) profits interest
B) capital interest Reason: A capital interest is a partner's share of the net assets of a partnership at liquidation.
Partners are informed of their share of a partnership's income by: a) using the aggregate information prepared by the partnership and calculating their share individually b) examining the information return (Schedule K-1) that the partnership prepares for them c) contacting the IRS to request the information that is contained on the partnership's tax return
B) examining the information return (Schedule K-1) that the partnership prepares for them
Guaranteed payments are A) only deducted from ordinary income or loss and NOT a separately stated item. B) separately stated items and deducted from ordinary business income or loss. C) separately stated items, but NOT deducted from ordinary business income or loss.
B) separately stated items and deducted from ordinary business income or loss.
Murtaugh decides he is ready to leave the LW Partnership and sells his interest (basis = $30,000) to Riggs for $75,000. Murtaugh was an original partner in LW when it was formed 5 years ago. LW has no debt. What is Rigg's basis and holding period in his newly acquired LW interest?
Basis = $75,000; holding period begins at date of purchase
In which of the following scenarios will Billy meet the material participation test?
Billy participates in the activity for 120 hours. Mandy, his only other partner, participates for only 80 hours.
A partner contributes property or services in exchange for the general ownership interest called a(n)
Blank 1: partnership or Partnership Blank 2: interest or interests
Bobby contributes land with a value of $10,000 and an adjusted basis of $2,000 to the Harwell Partnership. What are Bobby's and Harwell's recognized gains/losses?
Bobby's gain = $0; Harwell's gain = $0
How does a partnership adopt an overall method of accounting for tax purposes?
By filing a tax return
How does a partnership adopt an overall method of accounting for tax purposes? By filing a tax return By contacting the IRS for permission By the biggest partner sending a letter to the IRS Commissioner
By filing a tax return Reason: Many partnership elections are made by simply filing the first tax return using those elections.
Which of the following is NOT an increase to a partner's adjusted basis in a partnership interest?
Cash distributions paid from the partnership to the partner
Which of the following is NOT a flow-through entity? S Corporation General Partnership Limited Liability Company C Corporation
C Corporation
Partnerships with ______ as partners are generally not eligible to use the cash method of accounting for tax purposes. individuals other partnerships C corporations
C Corporations
Which of the following is NOT a flow-through entity?
C corporation
Which of the following is NOT a flow-through entity? Limited liability company C corporation General partnership S corporation
C corporation Reason: C corporations are taxed at the entity level.
Partnerships with ______ as partners are generally not eligible to use the cash method of accounting for tax purposes.
C corporations
Which of the following is NOT an increase to a partner's adjusted basis in a partnership interest? a) Partner's share of separately stated gains b) Cash contributed by a partner to a partnership c) Cash distributions paid from the partnership to the partner d) Partner's share of partnership income
C) Cash distributions paid from the partnership to the partner
Clark is preparing to contribute property with a value of $5,000 and basis of $20,000 to a partnership. A better tax alternative is to: A) continue with the contribution. The built-in loss will NOT have to be recognized B) transfer the property to the partnership in exchange for a partnership interest C) sell the property, recognize the loss and contribute the cash from the sale
C) sell the property, recognize the loss and contribute the cash from the sale Reason: Clark will be able to recognize the loss by selling the property rather than contributing property with a built-in loss to a partnership.
The Rush Partnership earned business income of $30,000 and also generated long-term capital gains of $10,000. Rush must report the capital gains as a separately-stated item because: A) the partnership wants to measure its return on investment in various ways B) there is actually no compelling reason to state these items separately -- other than tradition C) the partners that receive their share of the gain may have differing treatment due to the tax rules that cover capital gains
C) the partners that receive their share of the gain may have differing treatment due to the tax rules that cover capital gains Reason: Separately stated items are disclosed separately in order to allow for the possibility that partners may have different tax treatments for those items.
Capital Interest Profit Interest Partnership interest
CI - Partners right to the net assets of the partnership at liquidation PI - Partner's right to the share of future income or losses of the partnership Partnership interest- The bundle off economic rights a partner receives for his investment in a partnership
Which of the following is NOT a decrease to basis in a partnership interest? A) Separately stated loss items B) Partner's share of non-deductible expenses C) Cash distributions made by the partnership to the partner D) An increase in the partner's share of the debt of the partnership
D) An increase in the partner's share of the debt of the partnership Reason: An increase in the partner's share of debt of the partnership increases the basis of a partnership interest.
Taylor Partnership is a general partnership with 3 equal partners. In the current year, Taylor generated taxable business income of $3,000 and made $0 distributions to its partners. How will the $3,000 be taxed for Federal income tax purposes? A) No tax at the partnership level and no tax at the partner level since no distributions were made. B) Tax all $3,000 at the partnership level and tax none at the partner level. C) Tax all $3,000 at the partnership level and the after-tax amount is taxed to the partners. D) No tax at the partnership level and all $3,000 taxed at the partner level.
D) No tax at the partnership level and all $3,000 taxed at the partner level.
Nadia contributed cash of $20,000 to form the USSR Partnership. At the same time, Elena contributed land worth $20,000 (her basis was $5,000 at the time of contribution). They both received a 50% capital and profits interest. Shortly after the partnership was formed, USSR sold the land for $22,000. How is the gain on the sale of the land allocated to the partners?
Elena $16,000; Nadia $1,000
Nadia contributed cash of $20,000 to form the USSR Partnership. At the same time, Elena contributed land worth $20,000 (her basis was $5,000 at the time of contribution). They both received a 50% capital and profits interest. Shortly after the partnership was formed, USSR sold the land for $22,000. How is the gain on the sale of the land allocated to the partners? Elena $15,000; Nadia $2,000 Elena $11,000; Nadia $11,000 Elena $16,000; Nadia $1,000
Elena $16,000; Nadia $1,000 Reason: The built-in gain of $15,000 must be allocated to the contributing partner. The remaining gain of $2,000 is shared in accordance with the profit and loss sharing ratios.
Entity approach Aggregate approach
Entity app - Taxes the entity separate from the owners Aggregate app - Treats the entity as an aggregation of owner's interests
Losses from a partnership that exceed the partner's basis:
are suspended and carried forward until sufficient basis is created
