When may a partner deduct a partnership loss? Losses are used to offset which type of income?
Losses offset ordinary income unless the loss is due to passive activity and then it cannot be used to offset ordinary income.
Loss is limited to the lesser of:
(1) tax basis
(2) at-risk amount
What is included as a nonrecourse liability? How do these types of loans affect a partnership?
Nonrecourse liability is a loan wherein the partners themselves are not liable to repay should the partnership default on the loan. The loan is typically secured by property and the lender could foreclose on the property but not pursue the partners.
Nonrecourse liabilities are NOT included in the at-risk amount, but does add to the partner’s basis.
How are the basis and at-risk determined for a Limited Partner?
Nonrecourse loans increase the limited partner’s basis, but not the at-risk amount (b/c the partner is not liable to repay a nonrecourse loan)
Recourse loans are allocated to the partners who are responsible and are not allocated to a limited partner.
What activities or income types are considered “passive”?
Income from rental or real estate property
Nonactive participation in a partnership
Explain the rules for carryforward of losses for each category: (1) lack of basis, (2) lack of at-risk amount, (3) passive activity
(1) Lack of basis: use when basis becomes available
(2) Lack of at-risk: use when at-risk becomes available OR reduce gain from sale of partnership interest
(3) Passive activity: use to reduce future passive gain OR until sale of activity that generated the passive loss
What is the difference between a Guaranteed vs Nonguaranteed Payment to a partner? How are these handled for tax purposes?
Nonguaranteed Payments: A partner draw or distribution. Not deductible by the partnership and not taxable to the partner.
Guaranteed Payments = Salary: Salaries are deductible as an expense for the partnership and are regular income (wages) to the partner. The partner can be paid in cash, property at FMV, or for use of capital (interest).
Explain why “use of capital” will generate an interest expense for the Partnership and interest income for the partner.
A partner agrees to leave his available distributions in the partnership so that the partnership can use the money. If the partner took the distribution, he could earn interest from a savings acct. The partnership agrees to pay the partner interest in its place. That interest is taxable income to the partner.
How are retirement payments paid by a partnership treated for tax purposes?
Retirement payments (a pension) are a fringe benefit, taxed as ordinary income to the beneficiary and deductible by the partnership.
What items are included in organizational start-up expenditures?
Fees paid for legal services in drafting the partnership agreement
Fees paid for accounting services
What items are included in start-up costs?
Fees incurred prior to opening the business
How are taxes effected by organizational expenditures and start-up costs for the partnership?
The partnership may elect to deduct up to $5,000 EACH of org expenditures and start-up costs. This amount is reduced for costs >$50,000. The balance is amortized over 180 months.
True / False: Syndication costs are deductible?
A partnership transfers an asset to a creditor to settle a debt at less than the original loan amt. Does this cause a taxable event? If so, how?
The difference between the unpaid loan amount and the FMV of the asset transferred is considered a cancellation of debt and is considered income to the partnership and taxable to the partners.
Name the items reported separately on a partner’s K-1
Net business income/(loss)
Guaranteed payments to partners
Net “active” rental real estate income/(loss)
Net “passive” rental real estate income/(loss)
Section 179 expense election
Investment interest expense
Partners’ health insurance premiums (included in guaranteed payments)
Retirement plan contributions
A partner receives depreciable property as a distribution from the partnership. Which amount is deducted from the basis: adjusted basis or FMV? What if the value is greater than the partner’s available basis?
The adjusted basis is considered received and deducted from the partner’s basis
Any amount above the partner’s basis in the partnership reduces the asset’s basis (deferred gain) and the partner’s basis in the partnership is reduced to $0.
When both cash and property are distributed, which reduces the partner’s basis first? Why is this important?
Cash reduces the partner’s basis first.
If the total distribution is more than the partner’s basis, the land’s asset basis is then reduced as a deferred gain.
A partner receives cash in an amount greater than the partner’s basis in a nonliquidating distribution. How is the excess distribution handled for tax purposes?
The amount up to the basis is tax free. The excess amount is a taxable gain (loot).
Describe a Disregarded Entity.
A single individual files to become an LLC. The entity is recognized for legal purposes, but because it is run as a sole proprietorship (one member), the IRS disregaards its entity status and expects taxes to be filed through Schedule C (sole proprietorship).