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Basis of Contributing Partner's Interest in a partnership
- Cash
- Property @ NBV
- -Liabilties put in
- Services @ FMV
- Liabilities taken on
- =Initial Basis
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holding period of asset contributed to partnership
1231 asset: holding period includes the holding period of the partner's
oridinary income asset: holding period begins on the date the property is contributed to the partnership.
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partner basis formula
- beginning capital account
- cash
- FMV services
- NBV assets
- - liability
- + % of income
- ordinary
- capital
- tax-free
- - % of losses
- a partner may take a partnership loss as a tax deduction up to his/her basis
- - withdrawals
- = Ending captial account
- + % recourse liabilities
- = Year-end basis
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Partnership tax year
Calendar year: due Apr 15
or
Fiscal year: three month deferral (oct, nov, dec) is the max permitted
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when does a partnership terminate
- operations cease
- 50% or more of the toal partnership interest in both capital and proftis is sold or exchanged within any 12-month period
- there are less than two partners
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Related Party Loss
losses (directly or indirectly) between a controlling partner (over 50% interest in capital or profits) and his controlled partnership from the sale or exchange of property are not allowed.
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When is a partner's income taxable?
When it is earned, even if it is not withdrawn
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Discuss tax losses of partner
- deduction is limtied to the partner's adjusted basis in the partnership
- any unused loss can be carried forward and used in a future year when basis becomes available
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guaranteed payments
reasonable compensation paid to a partner for services rendered or use of capital without regard to his ratio of income.
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how are guaranteed payments treated?
- allowable tax deduction to the partnership (salary or interest expense depending on services vs use of capital, and
- income to the partner
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how are payments received by a retired partner treated, not in liquidation?
- recipient: oridinary income
- partnership: deduction
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organizational expenditures and start-up costs
- $5,000 max deduction, reduced after amount exceeds $50,000.
- Any excess is amortized over 180 months; starting in the month business begins.
- included costs:
- fees paid for legal services in drafting the partnership agreement
- fees paid for accounting services
- and fees paid for partnership filings
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syndication costs
costs of raising money - non-deductible
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How are partnership losses treated for each tax payer?
- generally: treated as an adjustment to partners' basis
- excess: loss>basis = excess is carryforward indefinitely and remais suspended until basis is re-established.
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three ways a partner may liquidate his partnership interest
- 1. complete withdrawal
- 2. sale of partnership interest, and
- 3. retirement or death
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Nontaxable liquidation equation
- Beg. Capital Account
- % Income (loss) up to withdrawal
- = partner's capital account
- % of liabilities
- =adjusted basis @ date of withdrawal
- - cash withdrawn
=remaining basis to be allocated to assets withdrawn
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When does a partner gain recognize a gain in a liquidation?
A partner recognizes a gain only to the extent that money received exceeds the partner's basis in the partnership.
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When does a partner recognize a loss in a liquidation?
The partner recognizes loss if only money, unrealized receivables, or inventory are received and the basis of the assets received is less that his adjusted basis in the partnership.
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Basis used and Stopping Point of:
1. nonliquidating withdrawal
2. liquidating withdrawal
- 1. Nonliquidating Withdrawal:
- Basis: NBV Asset Taken
- Stopping Point: Stop at zero
- 2. Liquidating Withdrawal:
- Basis: Partnership Interest
- Stopping Point: Must "zero-out" account
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Sale of Partnership General Rule
- The partner has a captial gain or loss when transferring a partnership interest because a partnership interest is a capital account.
- Capital Gain (Loss) Measured: difference between the amount realized for the sale and the adjusted basis of the partnership interest.
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Capital Gain or Loss Calculation in Sale of Partnership Interest (liquidation)
- beginning capital account
- % income (loss) up to sale
- = capital account @ sale date
- % of liabilities
- = adjusted basis
- - amount received: cash, COD, FMV property
= Capital Gain (Loss)
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Sale of Partnership Exception to General Rule
Any gain that represents partner's share of "hot assets" is treated as "ordinary income" as if cash were taken.
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Hot Assets
- unrealized receivables (as if exchanged for cash)
- appreciated inventory (as if exchanged for cash)
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Payments in regards to the Retirement or Death of a Partner
Payments to a retiring partner or to the interest successor of a deceased partner in liquidation of his entire partnership interest are allocated between payment for an interest in partnership assets an other payments.
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Payments for a partnership interest in regards to the retirement or death of a partner
payments for the interest in partnership assets result in capital gain or loss
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Other Payments in regards to the retirement or death of a partner
- If the payments are measured by partnership income, they are treated as partnership income regardless of the period over which they are paid.
- Thus, such payments are taxable as ordinary income to the retired partner as if he or she continued to be a partner.
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Proration or Partnership Income and Losses
example: Partner A (20% partner) sells to Partner B on Mar. 31. Proration?
Where a partner sells his or her interest to a new partner in the middle of the tax year, the selling partner's share of partnership income or losses must be allocated pro-rata (based on the date of sale) between the selling partner and purchasing partner.
Example: Sale date 1/4 of the year. Partner A will report 5% (20% * 0.25) of partnership's annual income or losses. Partner B reports 15% of partnership's annual income or losses.
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