Partnership Taxation Flashcards
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 elects the method used to depreciate partnership property with the results passed through to the partners. This method may be any type approved by the IRS.
If any of the partners do not use the same treatment as the partnership and do not notify the IRS of the different treatment, the IRS may adjust the partner’s return to conform to the return of the partnership with the additional tax being assessed
George and Martha are equal partners in G&M Partnership. At the beginning of the current tax year, the adjusted basis of George’s partnership interest was $32,500, which included his share of $40,000 of partnership liabilities. During the tax year, the following information applied to G&M:
Operating loss $30,000
Interest and dividend income 8,000
Partnership liabilities at end of year 24,000
What was the basis of George’s partnership interest at year end?
$13,500 - 50% of the loss and income impacts George’s basis. Partnership debt decreased by $16,000 ($40,000 - $24,000) during the year, so George’s basis is decreased by 50% of the reduction, or $8,000. Ending basis is computed as follows:
Beginning basis $32,500 Operating loss (15,000) Interest and dividend income 4,000 Partnership debt change ( 8,000) Ending basis $13,500
Which of the following should be used in computing the basis of a partner’s interest acquired from another partner?
- Cash paid by transferee to transferor
- Transferee’s share of partnership liabilities
Both
A partner’s basis in the partnership interest is increased by:
1. additional contributions;
2. additional interests purchased or inherited;
3. the partner’s share of the partnership’s income (including tax-exempt income); and
4. any increases in the partner’s share of partnership liabilities.
A partner’s basis in the partnership interest is decreased by:
- cash and the partnership’s adjusted basis of property received by the partner in a nonliquidating distribution;
- the adjusted basis allocable to any part of the partner’s interest sold or transferred;
- the partner’s share of the partnership’s losses; and
- any decreases in the partner’s share of partnership liabilities.
Dale’s distributive share of income from the calendar-year partnership of Dale & Eck was $50,000 in 2015. On December 15, 2015, Dale, who is a cash-basis taxpayer, received a $27,000 distribution of the partnership’s 2015 income, with the $23,000 balance paid to Dale in May 2016.
In addition, Dale received a $10,000 interest-free loan from the partnership in 2015.
This $10,000 is to be offset against Dale’s share of 2015 partnership income.
What total amount of partnership income is taxable to Dale in 2015? A. $23,000 B. $37,000 C. $50,000 D. $60,000
C - Partners must report their share of the partnership’s income, deductions and other items on the partner’s income tax return in the calendar year in which the partnership’s tax year ends. Dale’s share of Dale and Eck’s 2015 income was $50,000. Thus, Dale must report $50,000 of partnership income in 2015
PDK, LLC had three members with equal ownership percentages. PDK elected to be treated as a partnership. For the tax year ending December 31, year 1, PDK had the following income and expense items: Revenues $120,000 Interest income 6,000 Gain on sale of securities 8,000 Salaries 36,000 Guaranteed payments 10,000 Rent expense 21,000 Depreciation expense 18,000 Charitable contributions 3,000
What would PDK report as nonseparately stated income for year 1 tax purposes?
$35,000 - Non-separately stated income is the ordinary business income of the LLC, computed as follows: Revenues $120,000 Salaries (36,000) Guaranteed payments (10,000) Rent expense (21,000) Depreciation expense (18,000) Ordinary income $35,000
Don Wolf became a general partner in Gata Associates on January 1, 2015 with a 5% interest in Gata’s profits, losses, and capital.
Gata is a distributor of auto parts. Wolf does not materially participate in the partnership business. For the year ended December 31, 2015, Gata had an operating loss of $100,000. In addition, Gata earned interest of $20,000 on a temporary investment. Gata has kept the principal temporarily invested while awaiting delivery of equipment that is presently on order. The principal will be used to pay for this equipment.
Wolf’s passive loss for 2015 is
$5,000 - Passive activity losses are the amount that total losses from passive activities exceed total gains from passive activities. The characterization of a partner’s share of the partnership’s income as passive or nonpassive depends on the partner’s participation in the partnership’s income earning activities.
Since Wolf did not materially participate in the partnership business, his share of the partnership’s operating loss, $5,000, is considered a loss from a passive activity. Passive income does not include portfolio income.
As a result, Wolf’s share of the $20,000 in interest income would not be passive. Therefore, since Wolf had no gains from passive activities to offset the loss from his share of the partnership’s operating loss, Wolf would have a passive loss of $5,000, equal to his share of the partnership’s operating loss
Abe, Betsy, and Dan decide to form the equal ABD partnership at the beginning of Year One. Abe contributed depreciable assets that he has owned for five years that have a basis of $15,000 and a value of $20,000. Betsy contributed $20,000 cash. Dan contributed $12,000 in cash and land with a basis of $5,000 and a value of $8,000. How much income is allocated to Abe if the partnership sells the assets contributed by Abe for $18,000? A. $0 B. $1,000 C. $3,000 D. $5,000
C - The realized gain on the sale of the assets is $3,000 ($18,000 – $15,000 basis in assets). Abe’s built in gain on the contribution is $5,000. The amount of gain allocated to Abe is the lower of the realized gain or built-in gain, so $3,000 is the allocation.
Evan, a 25% partner in Vista Partnership, received a $20,000 guaranteed payment in 2015 for deductible services rendered to the partnership. Guaranteed payments were not made to any other partner. Vista’s 2015 partnership income consisted of:
Net business income before guaranteed payments $80,000
Net long-term capital gains 10,000
What amount of income should Evan report from Vista Partnership on her 2015 tax return?
$37,500 - Guaranteed payments from a partnership for the services of a partner are treated as salary payments and, as a result, are made without regard to the partner’s share of the partnership’s income. Thus, Evan would treat the $20,000 payment from the partnership for services rendered as income on her 2015 tax return. She also must report her share of the partnership’s net income. Since the guaranteed payments qualify as a deductible expense, Vista’s partnership income may be reduced by the amount of the expense. Hence, the partnership’s income would be $70,000; $80,000 in net business income before guaranteed payments plus the $10,000 net long-term capital gain less the $20,000 guaranteed payment. Evan’s 25 percent share of the partnership’s income would be $17,500 (25 percent × $70,000). Thus, Evan would report $37,500 in income from the Vista Partnership on her 2015 tax return − the sum of the guaranteed payment ($20,000) and her share of the partnership’s income ($17,500)
As a general partner in Greenland Associates, an individual's share of partnership income for the current tax year is $25,000 ordinary business income and a $10,000 guaranteed payment. The individual also received $5,000 in cash distributions from the partnership. What income should the individual report from the interest in Greenland? A. $5,000 B. $25,000 C. $35,000 D. $40,000
C - The partner must report $25,000 of ordinary income and the $10,000 guaranteed payment. The distribution does not generate additional income since the partner has sufficient basis to absorb it.
On June 30, 2015, Berk retired from his partnership.
At that time, his capital account was $50,000 and his share of the partnership’s liabilities was $30,000. Berk’s retirement payments consisted of being relieved of his share of the partnership liabilities and receipt of cash payments of $5,000 per month for 18 months, commencing July 1, 2015.
Assuming Berk makes no election with regard to the recognition of gain from the retirement payments, he should report income therefrom of
$0 in 2015 and $40,000 in 2016
Payments received by a retiring partner from the partnership in exchange for the partner’s interest in the partnership receive similar treatment to the receipt of a liquidating distribution. Thus, the retiring partner recognizes income only to the extent that “money” received exceeds the partner’s basis in the partnership interest. The assumption of a partner’s liabilities is viewed as being a “money” payment.
Immediately before retiring from the partnership, Berk had a balance of $50,000 in his capital account and his share of the liabilities amounted to $30,000, putting his adjusted basis in the partnership interest at $80,000. Berk’s retirement payments consisted of being relieved of his share of the partnership liabilities and receipt of cash payments of $5,000 per month for 18 months, commencing July 1, 2015. Thus, in 2015, Berk would receive $60,000 in distributions of “money,” $30,000 in liabilities assumed and $30,000 in cash payments ($5,000 per month multiplied by 6 months). The payments made to Berk in 2016 are not recognized in 2015 because Berk had no right to receive the income until paid in 2016.
Since Berk’s basis in the partnership interest, $80,000, is greater than the amount of “money’” received, $60,000, Berk would not recognize any income in 2015. This transaction would reduce Berk’s basis in the partnership interest by the $60,000 of income not recognized, going from $80,000 immediately before Berk retired to $20,000 at the end of 2015. Berk received an additional $60,000 in cash payments ($5,000 per month multiplied by 12 months) in 2016. Of this amount, Berk would recognize $40,000 in 2016, the $60,000 in cash payments less the $20,000 in basis not absorbed at the end of 2015.
Thus, Berk should not report any income from the retirement payments received in 2015, but he should report $40,000 from the payments in 2016.
The personal service partnership of Allen, Baker & Carr had the following cash basis balance sheet at December 31, 2014:
Assets Adjusted basis per book Market value Cash $102,000 $102,000 Unrealized accounts receivable -- 420,000 \_\_\_\_\_\_\_ \_\_\_\_\_\_\_ Totals $102,000 $522,000 Liability and Capital Note payable $ 60,000 $ 60,000 Capital accounts: Allen 14,000 154,000 Baker 14,000 154,000 Carr 14,000 154,000 \_\_\_\_\_\_\_ \_\_\_\_\_\_\_ $102,000 $522,000
Carr, an equal partner, sold his partnership interest to Dole, an outsider, for $154,000 cash on January 1, 2015. In addition, Dole assumed Carr's share of the partnerships liability. What amount of ordinary income should Carr report in his 2015 income tax return on the sale of his partnership interest? A. $0 B. $20,000 C. $34,000 D. $140,000
D - If a partner sells or exchanges his/her partnership interest and the partnership has either unrealized receivables or substantially appreciated inventory, the partner recognizes an ordinary gain to the extent that the amount realized by the partner due to the unrealized receivables or substantially appreciated inventory is greater than the partner’s basis in the items.
When Carr sold his partnership interest in Allen, Baker and Carr, the partnership had unrealized receivables. The amount realized by Carr due to the unrealized receivables was $140,000, the partnership’s total unrealized receivables of $420,000 multiplied by Carr’s one-third ownership interest.
Carr does not have any basis in the unrealized receivables (indicating that none of the receivables have been collected). Hence, Carr must report an ordinary gain of $140,000, the $140,000 realized by Carr due to the unrealized receivables less Carr’s basis in the receivables, which is zero.
