R5 M3 - Partnerships: Part 2
Basic Partnership, a cash-basis calendar year entity, began business on February 1, Year 1. Basic incurred and paid the following in Year 1: Filing fees incident to the creation of the partnership $3,600 Accounting fees to prepare the representations in offering materials 12,000 Basic elected to amortize costs. What was the maximum amount that Basic could deduct on the Year 1 partnership return? A. $11,000 B. $3,600 C. $2,860 D. $220
*B. $3,600* Explanation Choice "B" is correct. *Only the filing fees* incident to the *creation* of the partnership are *eligible expenditures*. Generally speaking, *expenditures up to $5,000 can be immediately deducted*. Remaining expenses are *amortized over 180 months*.
Hart's adjusted basis of his interest in a partnership was $30,000. He received a nonliquidating distribution of $24,000 cash plus a parcel of land with a fair market value and partnership basis of $9,000. Hart's basis for the land is: A. $9,000 B. $6,000 C. $3,000 D. $0
*B. $6,000* Explanation Choice "B" is correct. Hart's basis for the land is $6,000. *Rule*: The basis of property received in a distribution, other than in liquidation of a partner's interest, will generally be the same as the basis in the hands of the partnership immediately prior to distribution. However, in no case may the basis of property in the hands of the partner exceed the basis of his partnership interest reduced by the amount of money distributed to him in the same transaction. Partnership interest adjusted prior to distribution $30,000 Amount of cash distributed (24,000) Remaining basis after cash distribution 6,000 Distribution of land with basis of $9,000 (6,000) Remaining partnership interest $0 *The partnership interest may not be reduced below zero*. Therefore, the land has a *basis of $6,000* in the hands of the partner.
The method used to depreciate partnership property is an election made by: A. The partnership and must be the same method used by the "principal partner." B. The partnership and may be any method approved by the IRS. C. The "principal partner." D. Each individual partner.
*B. The partnership and may be any method approved by the IRS.* Explanation 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*. Choice "A" is incorrect. The method need not be the same as that used by the principal partner. Choice "C" is incorrect. The election is not made by the principal partner. Choice "D" is incorrect. The election is not made by each individual partner.
Acme Partnership reported the following items of income and expense: Sales $200,000 Cost of goods sold 115,000 Interest expense on bank line of credit 13,000 Charitable contributions 2,000 Administrative expenses 50,000 Long-term capital gain 10,000 What amount should be reported as ordinary income? A. $32,000 B. $30,000 C. $22,000 D. $20,000
*C. $22,000* Explanation Choice "C" is correct. Sales $200,000 Cost of goods sold (115,000) Administrative expenses (50,000) Interest expense on bank line of credit (13,000) =Ordinary business income $22,000 *The charitable contributions of $2,000 and the long-term capital gain of $10,000 are separately stated items*. The interest expense on a bank line of credit is business interest expense, which is included in ordinary income. Only *investment interest expense* is a separately stated item.
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.
*C. Services or the use of capital without regard to partnership income.* Explanation Choice "C" is correct. Under the Internal Revenue Code, guaranteed payments are payments to partners for services rendered or the use of capital without regard to partnership income.
A *domestic limited liability company* not classified as a corporation under IRS regulations is *owned entirely by one individual taxpayer*. Unless the taxpayer elects otherwise, the company will be taxed as: A. A trust. B. A partnership. C. An S corporation. D. A disregarded entity.
*D. A disregarded entity.* Explanation Choice "D" is correct. A single-member limited liability company (LLC) is a disregarded entity that is considered to be the same entity as the owner. If the owner is an individual, the LLC is taxed as a sole proprietorship and the income and deductions are reported on Schedule C of the individual's Form 1040 federal income tax return. Choice "A" is incorrect. A single-member LLC is taxed as a disregarded entity, not a trust. Choice "B" is incorrect. An *LLC with more than one member* is taxed as a *partnership*, but a single-member LLC is taxed as a disregarded entity. Choice "C" is incorrect. A single-member LLC is taxed as a disregarded entity, not an S corporation
Two individuals are planning to start a business and need advice on selecting the appropriate form of entity. Their long-term business plan contemplates receiving future in-kind property distributions. Which of the following is a pair of business entities each of which can make a distribution of appreciated property to its owners that would *not* be taxable to the business entity or to its owners? A. C corporation and a limited liability company. B. Limited liability company and an S corporation. C. S corporation and a general partnership. D. General partnership and a limited liability partnership.
*D. General partnership and a limited liability partnership.* Explanation Choice "D" is correct. In general, a *nonliquidating distribution in a partnership*—whether a general partnership or a limited liability partnership—is *nontaxable*, both as to the partnership and as to the partner. Choice "A" is incorrect. A C corporation is an entity apart from its owners. When it makes a distribution to an owner (shareholder), that is a taxable event. A limited liability company with more than one owner (member) typically is taxed like a partnership and so could make a nontaxable distribution to its owners. Choice "B" is incorrect. A limited liability company might be a sufficient entity for the individuals, but an S corporation would not be sufficient in all situations. Although typically profits and losses flow through an S corporation to its shareholders and so distributions are not taxable, they are taxable if the S corporation has earnings and profits that were carried over from a former C corporation or if appreciated property is distributed. Choice "C" is incorrect. Whereas a general partnership will provide the desired results, an S corporation will not be a good choice because distributions from an S corporation may be taxable in certain circumstances.
The individual partner rather than the partnership makes which of the following elections? A. Election to amortize organizational costs. B. Nonrecognition treatment for involuntary conversion gains. C. Code Section 179 deductions for tangible personal property. D. Whether to take a deduction or credit for taxes paid to foreign countries.
*D. Whether to take a deduction or credit for taxes paid to foreign countries.* Explanation 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. Choice "A" is incorrect. The election to amortize organizational costs is made at the partnership level, not at the partner level. Choice "B" is incorrect. The election not to recognize involuntary conversion gains is made at the partnership level, not at the partner level. Choice "C" is incorrect. The election to expense Section 179 property is made at the partnership level, not at the partner level.