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CPA Regulation Notes - Chapter 4

CPA Regulation Notes - Chapter 4

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Published by: Future CPA on Jun 29, 2009
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 Becker 2009 Edition Chapter 4 Page 1 of 10
Chapter 4 – Partnership Taxation
FORMATIONGeneral Rule
No gain or loss is on a contribution of property to a partnership in return for a partnership interest.Exceptions to non-recognition of gain (taxable events):
Capital interest acquired for services rendered (FMV)
Value of partnership interest acquired for services is ordinaryincome to the partner
Property subject to a (excess) liability
Property contributed subject to excess liability, the excess amount is taxableboot as a gain to the partnerBasis:
Cash – Amount contributed
Property – Adjusted basis (NBV)
<Liabilities> - Put in by partner and is assumed by other partners is a reduction
Services – FMV and taxable to incoming partner
Liabilities – Other partners’ put in liabilities, and is assumed by incoming partnerIncome BasisTaxable
FMV
FMVNon-taxable
None
NBVProperty subject to a excess liability = taxable boot
Property is contributed which has liability where the decrease in thepartner’s individual liability exceeds his partnership basis, the excess amount is taxable boot = taxable gain to the partnerPartnerships
Subtract only the liabilities assumed by the other partners and not the entire liabilityCorporations
Subtract 100% of liabilityPartner’s capital account in a partnership can never begin with a negative balance (when liabilities assumed bypartnership are greater than the basis (NBV) of assets contributed). The excess liability is treated like taxable boot, not anegative capital account.The partner’s original holding period (before the partnership) remains as the partnership’s holding period if it is a capitalasset or Section 1231 asset. (Partner bought asset in 1981, gave to partnership in 2007. Holding period = 1981).If ordinary income asset (i.e. inventory), the holding period restarts when the partnership acquires it (in 2007).Contributions = increase basisWithdrawals = decrease basisWhen a partner contributes property (which has a FMV that is higher or lower than basis), the “built-in” gain or loss withrespect to the contributed property (when sold) must be allocated to the contributing partner.Partnership’s basis for contributed property = NBVPartnership takes the contributor’s basis for any contributed property (plus any gain recognized by the incoming partner).
 
 Becker 2009 Edition Chapter 4 Page 2 of 10
BASIS
B –
Beginning Capital AccountCashFMV servicesNBV assets <liability>
A –
+ % All IncomeOrdinaryCapitalTax-free
S –
<% All Losses><Withdrawals>Partner may take a partnership loss as a tax deduction upto his/her basisProperty distribution reduce by adjusted basis (NBV) ofdistributed property; up to -0- in capital account
E –
Ending Capital Account+ % Recourse Liabilities= Year-End Basis***Difference between capital account and partnership basis:Basis = Capital Account + Partner’s Share of LiabilitiesPartnership tax returns
Not subject to income taxes, but files a partnership tax return for only the information(Schedule K and K-1)Tax year – Calendar year required. Otherwise 3 month deferral is permitted (ends on Sept.30, Oct.31, Nov.30, Dec. 31)Partnership terminates when:1. Operations cease2. 50% or more of the total partnership interest in both capital and profits is sold or exchanged within any 12-monthperiod
Close old account and open new account!!3. There are less than two partnersTermination = 1. Distribution to remaining partners and purchaser, 2. Re-contribution of assets to a new partnershipRelated party = transactions between partnership and a controlling partner (over 50%):
Related party loss (WRaP) is Disallowed
Related party gain is ordinary incomeDetermination of partner’s share of income, credits, and deductions
A partner must include his distributive share of partnership income – even if not received – in his tax return for histaxable year within which the taxable year of the partnership ends
Income
Taxable
Increase basis
Withdrawals
Non-taxable
Decrease basisPartnership loss deduction is limited to the partner’s adjusted basis, which is increased by partnership liabilities that he ispersonally liable for.Any unused loss can be carried forward and used in a future year when basis is available.
 
 Becker 2009 Edition Chapter 4 Page 3 of 10
Guaranteed payments = salary to partners
Deductible to the partnership
Taxable income to the partner: included on Schedule K-1 as ordinary income, and may be included as part of netearnings from self-employmentNot-guaranteed payments = not deductible to partnerships b/c it is another way to distribute profitsPayments received by retired partners = 1. Deductible to partnership, 2. Ordinary income to recipientMost elections that affect the calculation of taxable income are made by the partnership (i.e. depreciation and accountingmethods)Organizational expenditures and start-up costs:
o
Same as before – deduct up to $5,000 each for organizational expenditures and start-up costs, reduced if eithertypes of cost exceed $50,000. Excess costs are amortized over 180 months (GAAP rule: expense immediately)Syndication costs (i.e. offering materials, raising money) are not deductibleWhen partnership transfers a capital or profits interest in the partnership to a creditor in satisfaction of partnership debt,the partnership recognized “cancellation of debt” income.Partnership does not pay taxes
It reports partnership income and losses on K-1Partnership files an information return Form 1065 by April 15 (extension to July 15)Items pass through each individual partner as separate line items to be treated by each partner according to their portionThe items are reflected on K-1 and each partner gets their own K-1Individual partners report net income or loss on Schedule E
o
Partner must include on his personal income tax return his distributive share of each separate “pass-thru” item
o
Guaranteed payments are distributive deductions to the partners via the partnership K-1 and also taxable incometo individual partner receiving the paymentsPartner’s share of loss is limited to the basis. A partner cannot have a negative loss.The excess of basis is a carry-forward indefinitely.DISTRIBUTION- Treat like bank withdrawals!- Generally, it is non-taxable to partner- Distribution of cash or property received is the same basis as with the partnership- Property =
N
on-taxable =
N
BV (but limited to basis)
o
The basis may not exceed basis in partnership
o
Stop at zero!- Gain is only recognized to the extent of cash excess the basisLIQUIDATION3 ways:1. Complete withdrawal2. Sale of partnership interest3. Retirement or deathComplete withdrawal (liquidation)Partner’s basis = same as basis in partnership, but reduced by any monies actually received

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