Chp 14

• Partnerships


  • Advantages: income and losses flow through directly to the individual partners, you have to declare your share income, the partnership itself doesn't pay income, and no entity-level
  • Taxable on your share of partnership income even if they decide to not distribute anything
  • Your corporation can be a partner in a partnership
  • All states have some form of LLP Limited liability Partnership: a way partners can avoid liability
  • Problem: General partners had unlimited liability: if the partnership got sued and the partners were not at fault, then they could still be held liable
  • LLP: you will have legal protection from the wrongdoing of others, no legal protection from your own wrongdoing, similar to LLC has to be granted under state law
  • Advice: consider LLP if you want to consider a partnership
  • General Partnership: unlimited liability rare, most have LLP
  • Watch out: Estoppol: even though you have not formed a partnership and you didn't intend to be in a partnership law suite can say, they were acting in a matter of a partnership. Assume a general partnership which is an unlimited liability - liable for negative results
  • Limited partnership: only lose what they invested, not making decisions or active role
• 1065 form


  • Cash or accrual or hybrid
  • No capital gain or interest income
  • Flowthrough: income and losses flowing through the individual are reported separately and not on the partnerships sheet
  • Items not connected to partnership or business are separate items that pass through to the partners
  • Page 1 1065 and page 1 1120 are similar (same passthrough issues)
  • S-corp no guaranteed payments only exclusive to partnerships: subject to the self employed tax
  • Partnership itself is not a taxable entity, business income will passthrough each partnership
  • Limited partner will not be subject to self-employment tax
• Schedule K


  • Line 1: 300k ordinary business income same as page 1 of 1065
  • Line 5: Interest income 5k (amount in bank account) separate items of passthrough for each partner share reported on K1
  • Line 6: ordinary dividends - corp owns stock and are separate items of passthrough for each partner share reported on K1. Qualified at preferential tax rate. Not qualified at marginal tax rate
  • Line 8: (10K) net short term gain/loss schedule D, investments not part of partnership, separate items of passthrough for each partner share reported on K1
  • Line 9: (15k) net long term gain/loss schedule D, investments not part of partnership, separate items of passthrough for each partner share reported on K1
  • Line 13A charitable contributions are separate items of passthrough for each partner share reported on K1
  • Line 13b: investment interest expense: borrow money to purchase stock the interest will be an investment and only deductible to the extent to investment income
  • Line 14a net earnings from self-employment, a partner cannot be an employee of a partnership, instead self-employment tax higher than income tax, if passive partner no self employed
  • Line 18a tax-exempt interest income ->reported to the partner
  • 18c no deducted expenses->reported to the partner
  • 19a distributions of other property
• K1


  • General or limited partner (figure if you at a material participant, income and losses will not be passive)
  • Domestic partner (US person?)
  • L:capital account (not tax biases)
  • M:builtin gain or loss
  • Line 1: share of the total Schedule K
  • Line 4a: all guaranteed pmt went to the partner
  • Line 5: interest income share of the total shedule K
  • Line 6a: ordinary dividends share of the total schedule K
  • Line 6d: same as above
  • Line 8 & 9a: same as above STCG LTCG
  • Line 13: other deductions
  • Line 14: self-employment earnings (partner in a partnership is considered to be self-employed not an employee) income reported to the general partner as subject to the self-employment tax (line 1 and Line 4a added together is the amount)
  • Line 18: nontaxable items (share percentage of schedule K)
  • Line 19: distributions made to this partner
• 1. Corp can be an employee in a partnership but in Partnerships you cant
• 1. Corp do not have capital accounts. Not self-employed but considered employees
• Partnership


  • tax basis is important bc they can only deduct there share of losses, once its gone the losses would be suspended under the at risk rules
  • No such thing as negative tax baises
  • Possible to have a negative capital account
  • Difference between tax bases and capital account. The FMV bases a capital account contributed to the partnership
  • Tax basis is the same as the partnership. The partner transfers property then it would be the same transfer basis. Can contribute at any time and any percent of ownership and NOT be TAXBALE. No gain no loss recognition, mandatory
• Liabilities


  • When a partnership incurs a liability, the partner is responsible for their share of the liability, the partners basis and capital account will increase by there share
  • For partnerships, paying liabilities will decrease tax basis and capital for partner A and decrease for other partners
  • S-corp assumes a liability the shareholders do not get to increase their tax basis
• Built in gain/loss


  • Partner can contribute property with a built in gain or built in loss
  • Built in gain: FMV of the property is higher than the Adj basis
  • Built in loss: Value of the property is less than the adj basis
  • If the property is sold by the partnership a special allocation (complex) of gain or loss will have to be made by the partnership
  • Special allocations: require if the partner contributed property with build in gain or loss on the date on contribution. Then the built-in gain/loss will have to be allocated to the contributed partner if the property is sold by the partnership and specially allocated to the partner and the rest will be divided according to percentage (not in S-corporations)
• Guaranteed payments


  • Give up partnership position: solution 50% partners, partner B guaranteed payment
  • It is a payment before the profits are divided 50/50
  • Considered tax deduction and expense (salary) but partner cannot receive salary but can receive a guaranteed pmt
  • To be deducted: it cannot be tide to the profitability, has to be payable even if the partnership is losing money.
  • The partner receiving a guaranteed pmt does not increase the capital amount or basis only increases the capital of the taxes come back and have an amount. Will be on the K1 as self employment income (pay there own SS and Medicare, 15.3%)
  • Can be tied to gross receipts, can be 5% of gross receipts, but not profitability
  • Can get a Guaranteed pmt to the capital contribution
  • Example: Partner A agrees to provide the capital 300k, Partner B has no money but agrees to run it, then requests 50/50 and wants a guaranteed PMT. The other partner wants a guaranteed pmt on 5% of capital contribution, then it has to be paid without profitability
• Distributions


  • Two types Liquidating and non liquidating
  • General rule: partner is not going to be taxed on a distribution on the partnership
  • Exceptions hot assets or assets with capital gain
  • Partnership will be taxed on the allocated income to each partner
  • If cash distribution to a partner exceeds the partners tax basis, the partner will have to recognize income, if don't exceed then not taxable income
  • Liability reduction/relief: from paying the liabilities it is treated as a cash distribution, basis's goes up for liabilities, but go down when liabilities are paid
  • NON-CASH Assets distributed to a partner, it will NOT have to recognize any income
  • Property distributions are not taxable
• Partnerships


  • Advantages: income and losses flow through directly to the individual partners, you have to declare your share income, the partnership itself doesn't pay income, and no entity-level
  • Taxable on your share of partnership income even if they decide to not distribute anything
  • Your corporation can be a partner in a partnership
• Limited Liability Partnership (LLP)


  • A way partners can avoid liability
  • You will have legal protection from the wrongdoing of others, no legal protection from your own wrongdoing, similar to LLC has to be granted under state law
• General Partnership


  Unlimited liability rare, most have LLP
• Estoppol: even though you have not formed a partnership and you didn't intend to be in a partnership law suite can say, they were acting in a matter of a partnership. Assume a general partnership which is an unlimited liability - liable for negative results.
• Limited partnership


  Only lose what they invested, not making decisions or active role
• If you are losing money


  Passive losses can't be deducted unless passive income
• 1065 form


  • Cash or accrual or hybrid
  • No capital gain or interest income
  • Flowthrough: income and losses flowing through the individual are reported separately and not on the partnerships sheet
  • Items not connected to partnership or business are separate items that pass through to the partners
• Page 1 1065 and page 1 1120 are similar (same passthrough issues)
• 1. corp


  No guaranteed payments only exclusive to partnerships: subject to the self employed tax
• Partnership itself is not a taxable entity, business income will passthrough each partnership
• Limited partner


  Will not be subject to self-employment tax
• Schedule K


  Shows all the items that will pass through the partnership to the partner's tax return (all the partners info) same as 1120 S is the same items to the shareholders
• Schedule K Line items


  • Line 1: 300k ordinary business income same as page 1 of 1065
  • Line 5: Interest income 5k (amount in bank account) separate items of passthrough for each partner share reported on K1
  • Line 6: ordinary dividends - corp owns stock and are separate items of passthrough for each partner share reported on K1. Qualified at preferential tax rate. Not qualified at marginal tax rate
  • Line 8: (10K) net short term gain/loss schedule D, investments not part of partnership, separate items of passthrough for each partner share reported on K1
  • Line 9: (15k) net long term gain/loss schedule D, investments not part of partnership, separate items of passthrough for each partner share reported on K1
  • Line 13A charitable contributions are separate items of passthrough for each partner share reported on K1
  • Line 13b: investment interest expense: borrow money to purchase stock the interest will be an investment and only deductible to the extent to investment income
  • Line 14a net earnings from self-employment, a partner cannot be an employee of a partnership, instead self-employment tax higher than income tax, if passive partner no self employed
  • Line 18a tax-exempt interest income ->reported to the partner
  • 18c no deducted expenses->reported to the partner
  • 19a distributions of other property
• K1


  • Each partnership gets one
  • General or limited partner (figure if you at a material participant, income and losses will not be passive)
  • Domestic partner (US person?)
  • L:capital account (not tax biases)
  • M:builtin gain or loss
  • Line 1: share of the total Schedule K
  • Line 4a: all guaranteed pmt went to the partner
  • Line 5: interest income share of the total shedule K
  • Line 6a: ordinary dividends share of the total schedule K
  • Line 6d: same as above
  • Line 8 & 9a: same as above STCG LTCG
  • Line 13: other deductions
  • Line 14: self-employment earnings (partner in a partnership is considered to be self-employed not an employee) income reported to the general partner as subject to the self-employment tax (line 1 and Line 4a added together is the amount)
  • Line 18: nontaxable items (share percentage of schedule K)
  • Line 19: distributions made to this partner
• 1. Corp can be an employee in a partnership but in Partnerships you cant
• 1. Corp do not have capital accounts. Not self-employed but considered employees
• Partnership tax basis


  • Important because they can only deduct their share of losses, once it's gone the losses would be suspended under the at risk rules
  • No such thing as negative tax bases
  • Possible to have a negative capital account
  • Difference between tax bases and capital account. The FMV bases a capital account contributed to the partnership
  • Tax basis is the same as the partnership. The partner transfers property then it would be the same transfer basis. Can contribute at any time and any percent of ownership and NOT be TAXABLE.
  • No gain no loss recognition, mandatory
  • Transfer basis and transfer holding in the partnership interest
• Liabilities


  • When a partnership incurs a liability, the partner is responsible for their share of the liability, the partners basis and capital account will increase by their share
  • For partnerships, paying liabilities will decrease tax basis and capital for partner A and decrease for other partners
  • S-corp assumes a liability the shareholders do not get to increase their tax basis
• Built in gain/loss


  • Partner can contribute property with a built in gain or built in loss
  • Built in gain: FMV of the property is higher than the Adj basis
  • Built in loss: Value of the property is less than the adj basis
  • If the property is sold by the partnership a special allocation (complex) of gain or loss will have to be made by the partnership
• Special allocations


  Required if the partner contributed property with build in gain or loss on the date on contribution. Then the built-in gain/loss will have to be allocated to the contributed partner if the property is sold by the partnership and specially allocated to the partner and the rest will be divided according to percentage (not in S-corporations)
• Guaranteed payments


  • Give up partnership position: solution 50% partners, partner B guaranteed payment
  • It is a payment before the profits are divided 50/50
  • Considered tax deduction and expense (salary) but partner cannot receive salary but can receive a guaranteed pmt
  • To be deducted: it cannot be tied to the profitability, has to be payable even if the partnership is losing money.
  • The partner receiving a guaranteed pmt does not increase the capital amount or basis only increases the capital of the taxes come back and have an amount. Will be on the K1 as self employment income (pay their own SS and Medicare, 15.3%)
  • Can be tied to gross receipts, can be 5% of gross receipts, but not profitability
  • Can get a Guaranteed pmt to the capital contribution
• Distributions


  • Two types Liquidating and non liquidating
  • General rule: partner is not going to be taxed on a distribution on the partnership
  • Exceptions hot assets or assets with capital gain
  • Partnership will be taxed on the allocated income to each partner
  • If cash distribution to a partner exceeds the partners tax basis, the partner will have to recognize income, if don't exceed then not taxable income
  • Liability reduction/relief: from paying the liabilities it is treated as a cash distribution, basis's goes up for liabilities, but go down when liabilities are paid
  • NON-CASH Assets distributed to a partner, it will NOT have to recognize any income
  • Property distributions are not taxable
• Partnership


  An association of two or more persons to carry on a trade or business, contribute money, property, or labor, and expect to share in profit and losses
• Entities Taxed As Partnerships


  • General partnership
  • Limited liability partnership (LLP)
  • Limited partnership
  • Limited liability company (LLC)
• General partnership


  • Consists of at least 2 partners
  • Partners are jointly and severally liable
• Limited liability partnership (LLP)


  • An LLP partner is not liable for malpractice committed by other partners
  • Popular organizational form for large accounting firms
• Limited partnership


  • Has at least one general partner
  • Only general partner(s) are liable to creditors
• Limited liability company (LLC)


  • Combines the corporate benefit of limited liability with benefits of partnership taxation
  • Owners are "members", not partners, but if properly structured will receive partnership tax treatment
• "Check the box" regulations

  Entities that are not formally partnerships may elect to be taxed as partnerships by checking the appropriate box on the partnership tax return