Transcript Slide 1

Chapter 10B.
Partnership
Operation
C11-Chp-10-1B-Ptshp-Operate-2011
Edited January 4, 2011
This file covers pages 20 through 44
Howard Godfrey, Ph.D., CPA
Professor of Accounting
Copyright 2011
The student should be able to:
4. Differentiate between items that
must be separately stated and those
that are included in ordinary income
or loss for partnerships that are not
electing large partnerships.
5. Calculate a partner's distributive
share of partnership income, gain,
loss, deduction or credit items.
6. Explain the requirements for a
special partnership allocation.
7. Calculate a partner's basis in a
partnership interest.
8. Determine the limitations
on a partner's deduction of
partnership losses.
9. Determine the tax consequences
of a guaranteed payment.
10. Explain the requirements for
the holder of a partnership
interest to be recognized as a
partner in a family partnership.
11. Determine the allocation of
partnership income between a
donor and a donee of a
partnership interest.
12. Determine the requirements for
filing a partnership tax return.
4. Differentiate between
items that are separately
stated and those that are
included in ordinary income
or loss for partnerships that
are not electing large
partnerships.
Practice Question
In computing the ordinary
business income of a partnership,
a deduction is allowed for:
a. Net operating loss deduction.
b. Depreciation Expense
c. Short-term capital losses.
d. Gifts to qualified charities.
6
Practice Question
In computing the ordinary
business income of a partnership,
a deduction is allowed for:
b. Depreciation Expense
7
JM Partners -1
John and his wife Mary are equal
partners in JM Enterprises, which
operates as a partnership.
How would they report the income
and loss items from partnership
operations shown on the next
slide?
JM Partners - 2
Consulting revenue
$125,000
Travel expenses
40,000
Transportation
3,000
Advertising
7,000
Office expense
3,000
Telephone
1,000
Dividend Income
5,000
Interest Income
2,000
Charitable contribution
1,000
Political contribution
6,000
What is Partnership Income?
JM Partners-3
Information Form 1065 Sch- K
Consult rev.
$125,000
Travel exp.
40,000
Transport.
3,000
Advertising
7,000
Office exp.
3,000
Telephone
1,000
Dividends
5,000
Interest Income
2,000
Charitable. cont.
1,000
Political cont.
6,000
Ordinary Income
JM Partners-3A Information Form 1065
Sch- K
Consult rev. $125,000 $125,000
Travel exp.
(40,000) (40,000)
Transport.
(3,000)
(3,000)
Advertising
(7,000)
(7,000)
Office exp.
(3,000)
(3,000)
Telephone
(1,000)
(1,000)
Dividends
5,000
5,000
Interest
2,000
2,000
Char. cont.
(1,000)
(1,000)
Political cont.
(6,000)
(6,000)
Ordinary Income
$71,000
JM Partners-4
The $71,000 of items that make up net
income on Schedule C in the
preceding problem will all be reported
as net income on Form 1065.
The dividends, interest and charitable
contributions will be reported on
Schedule K (Form 1065) as separately
stated items and the political
contribution will be reported as a
nondeductible item.
JM Partners-5
John and Mary will each receive a
Schedule K-1 reporting their shares of
the net income, separately stated
items, and nondeductible item.
These will then be included in their
Form 1040, with dividends and interest
income on Schedule B and the
charitable contributions included with
other charitable contributions and
reported as an itemized deduction.
13
5. Calculate a partner's
distributive share of
partnership income,
gain, loss, deduction
or credit items.
Gil & Bill partnership had net income
per books of $37,000 which included:
Dividend income
$1,000
ST capital loss
(4,000)
Section 1231 gain
7,000
Ordinary income
(sec. 1245 recapture)
1,500
Interest income
1,000
Ordinary Income
?
They share profits and losses equally.
What is partnership ordinary income?
Gil & Bill partnership had net income
per books of $37,000 which included:
Ordinary
Book income
$37,000
Dividend income
$1,000
ST capital loss
(4,000)
Section 1231 gain
7,000
Ordinary income
(sec. 1245 recapture) 1,500
Interest income
1,000
Ordinary Income
They share profits and losses equally.
What is partnership ordinary income
Gil & Bill partnership had net income
per books of $37,000 which included:
Ordinary
Book income
Adjustments
Dividend income
ST capital loss
Section 1231 gain
Ordinary income
(sec. 1245 recapture)
Interest income
Ordinary Income
$37,000
$1,000 ($1,000)
(4,000)
4,000
7,000
(7,000)
1,500
1,000
(1,000)
$32,000
6. Explain the
requirements
for a special
partnership
allocation.
George and Barbara form an equal
partnership. George contributes $15,000
cash and Barbara contributes land with a
fair market value of $15,000 and an
adjusted basis of $10,000.
A year later, the partnership sells the land
for $20,000.
How much of the gain on the sale will
Barbara report?
a. $2,000
b. $3,000
c. $4,000
d. $5,000
e. $7,500
19
Barbara contributes to partnership BASIS
Barbara contributes to partnership FMV
Barbara's partnership interest:
Partnership has carryover basis
Partnership sells land for
Total Gain
Gain since land was invested
Barbara reports income of:
All of built-in Gain
One-half of gain since investment
Total Gain reported by Barbara
10,000
15,000
50%
10,000
20,000
$10,000
$5,000
$5,000
2,500
$7,500
20
7. Calculate a
partner's basis
in a partnership
interest.
Taxation of Partnership Income
B. Partner's Basis. A partner's basis in his
partnership interest begins with his basis
in assets contributed to the partnership.
The partner's basis is increased by the partner's
share of the partnership liabilities.
Basis is increased by the partner's share of
income and decreased by the partner's share of
loss.
Basis limits the amount of losses deductible by
the partner and can never be less than zero.
22
Partner Basis - Sec. 705, 722, 742
Investment or Beginning Basis
Change in share of debt (+ or -)
Add: Ordinary Income
Separate Income & gains
Tax-free income
Contributions of Capital
Less: Ordinary Loss
Separate Exp. & Losses
Non-deductible Expenses
Partner Withdrawals
Ending Basis
BA Partnership- 1
Ben and Ann formed the BA Partnership as
equal partners.
Each partner contributed cash and property
with a value of $100,000 for partnership
operations.
As a result of these contributions, Ben had
a basis of $80,000 and Ann a basis of
$60,000 in their partnership interests.
At the end of their first year of operations,
they had the results on slide 26:
24
BA Partnership - 2
a. What is the net income, excluding
separately stated items, that each partner is
required to report at the end of the year?
b. How is each of the separately stated
items treated on the partners’ tax returns?
c. What is each partner’s basis at year-end?
25
BA Partnership -3
Gross sales
$150,000
Cost of goods sold
95,000
Rent Expense
15,000
Wages to employees
15,000
Utilities Expense
4,000
Charitable contributions
1,000
Section 1231 gain
2,000
26
BA Partnership - 4
Fm. 1065
Gross sales
$150,000
Cost of goods sold
95,000
Rent Expense
15,000
Wages to employees
15,000
Utilities Expense
4,000
Charitable contributions
1,000
Section 1231 gain
2,000
Ordinary Income
Each Ptnr reports 50%
27
BA Partnership - 4A
Fm. 1065
$150,000
(95,000)
(15,000)
(15,000)
(4,000)
Gross sales
$150,000
Cost of goods sold
95,000
Rent Expense
15,000
Wages to employees
15,000
Utilities Expense
4,000
Charitable contributions
1,000
Section 1231 gain
2,000
Ordinary Income
$ 21,000
Each Ptnr reports 50%
$ 10,500
28
BA Partnership - 5
a. Partnership net income is $21,000
($150,000 - $95,000 - $15,000 - $15,000 –
$4,000). Each partner reports $10,500 (50%
x $21,000).
b. Each partner’s share of Sec. 1231 gain
will be included with any other Sec. 1231
gains and losses in the Sec. 1231 gain and
loss netting process. Each partner’s share
of the charitable contribution will be
included with other charitable
contributions and reported as an itemized
deduction.
29
BA Partnership - 6
c. Ben’s basis at year end:
$80,000 + (50% x $21,000) +
(50% x $2,000) – (50% x $1,000)
= $91,000
Ann’s basis at year end:
$60,000 + (50% x $21,000) +
(50% x $2,000) – (50% x $1,000)
= $71,000
30
BA Partnership - 7
Investment or Beginning Basis
Change in share of debt (+ or -)
Add: Ordinary Income
Separate Income & gains
Tax-free income
Contributions of Capital
Less: Ordinary Loss
Separate Exp. & Losses
Non-deductible Expenses
Partner Withdrawals
Ending Basis
Ben
$ 80,000
BA Partnership - 7A
Investment or Beginning Basis
Change in share of debt (+ or -)
Add: Ordinary Income
Separate Income & gains
Tax-free income
Contributions of Capital
Less: Ordinary Loss
Separate Exp. & Losses
Non-deductible Expenses
Partner Withdrawals
Ending Basis
Ben
$ 80,000
10,500
1,000
(500)
$ 91,000
Andrew invested $10,000 for a 25% interest
in XYZ Partnership on 12-31-10.
In 2011, XYZ had taxable income of $20,000
and nontaxable income of $8,000.
XYZ Partnership also made a cash
distribution to Andrew of $12,000.
Assuming no other transactions occurred,
what is Andrew's basis in the partnership
at the end of 2011?
a. $-0
b. $5,000
c. $10,000 d. $17,000
33
XYZ Partnership
Investment or Beginning Basis
Change in share of debt (+ or -)
Add: Ordinary Income
Separate Income & gains
Tax-free income
Contributions of Capital
Less: Ordinary Loss
Separate Exp. & Losses
Non-deductible Expenses
Partner Withdrawals
Ending Basis
Andrew
$ 10,000
XYZ Partnership
Investment or Beginning Basis
Change in share of debt (+ or -)
Add: Ordinary Income
Separate Income & gains
Tax-free income
Contributions of Capital
Less: Ordinary Loss
Separate Exp. & Losses
Non-deductible Expenses
Partner Withdrawals
Ending Basis
Andrew
$ 10,000
5,000
2,000
(12,000)
$ 5,000
Taxation of Partnership Income
C. Partnership Distributions. Distributions
are generally tax-free to partners because
they already have paid taxes on the
earnings of the partnership.
Distributions reduce the partner's basis in
his partnership interest. If the distribution
exceeds basis, it generally will be taxed as
capital gain.
A loss is recognized when the partner
receives only cash, inventory, and
unrealized receivables in complete
liquidation of their partnership interest.
36
Partnership Reporting of Income
A. Partnership Taxable Income.
Ptshp taxable income is calculated like taxable
income of individuals with a few differences.
Taxable income is divided into separately stated
items and ordinary income or loss.
Certain deductions are not allowed to
partnerships.
These include income taxes paid or accrued to a
foreign country or U.S. possession, charitable
contributions, oil and gas depletion, and net
operating loss (NOL) carrybacks or carryovers.
37
Partnership Reporting of Income
B. Separately Stated Items.
A list of the items that must be separately
stated is found on page 10-21.
As a general rule, an item must be
separately stated if the income tax liability
of any partner that would result from
treating the item separately is different
from the liability that would result if that
item is included with partnership ordinary
income. See quote from regs on webpage.
38
Reporting Partnership Income
C. Partnership Ordinary Income.
All items that are not separately
stated are combined into a single
amount called partnership ordinary
income or loss.
Each individual partner's share of
ordinary income or loss is reported
on Schedule E of Form 1040.
39
Partnership Reporting of Income
D. U.S. Production Activities Deduction. For tax
years after 2004, the 2004 Jobs Act added a new
deduction for partnerships. In the case of a
partnership, the deduction applies at the partner
level, so the partnership must report each
partner’s share of qualified production activities
income on the partner’s Schedule K-1.
For the 50% salary limitation, each partner is
allocated a share of the partnership’s W-2 wages
equal to the lesser of (1) the partner’s allocable
share of such wages or (2) 9% of the qualified
production activities income allocated to the
partner.
Sch. K a& Sch. K-1s of a partnership tax return
are reproduced in Appendix B.
Partner Reporting of Income
A. Partner's Distributive Share.
A partner pays taxes on his distributive
share of Ptshp ordinary income or ordinary
loss and the separately stated income,
gain, loss, deduction or credit items.
Distributive share is normally determined
by the terms of the Ptshp agreement or, if
Ptshp agreement is silent, by the partner's
overall interest in the Ptshp as determined
by taking into account all facts and
circumstances.
Partner Reporting of Income
A. Partner's Distributive Share.
1. Partnership Agreement. Ptshp agreement may
describe a partner's distributive share by
indicating the partner's profits and loss interest,
or it may indicate separate profits and loss
interests. If only one interest percentage is
stated, it is used to allocate both profit and loss.
2. Varying Interest Rule. If a partner's ownership
interest changes during the partnership tax year,
the income or loss allocation takes into account
the varying interest. Income is generally
allocated under this rule on a pro rata basis.
B. Special Allocations.
1. Allocations Related to Contributed Property.
When property is contributed to a partnership, it
takes a substituted basis that references the
contributing partner's basis. Pre-contribution
gains or losses are allocated to the contributing
partner for any property contributed to a
partnership after March 31, 1984.
Income and deductions reported in connection
with the contributed property (e.g., depreciation)
must be allocated to reflect the difference
between FMV and adjusted basis on the date of
contribution.
43
Partner Reporting of Income
B. Special Allocations.
2. Substantial Economic Effect.
Special allocations relating to other
than contributed property must meet
certain criteria designed to ensure
that the allocations affect the
partner's economic consequences
and not just the tax consequences.
44
Partner Reporting of Income
B. Special Allocations.
The second requirement for a special
allocation to be accepted under the
Regulations is that the economic effect be
substantial, which requires that there is a
reasonable possibility that the allocation
will substantially affect the dollar amounts
to be received by the partners independent
of tax consequences.
45
Basis for Partnership Interest
A. Beginning Basis.
A partner's beginning basis for a partnership
interest acquired through contributing property or
services was discussed above.
If a partner purchases his partnership interest
from another partner, the basis is the purchase
price.
If the interest is inherited, the basis of the interest
is its FMV on the date of death, or alternate
valuation date if elected by the executor. If the
partnership interest is received as a gift, the basis
is generally the donor's basis increased by the
portion of any gift tax paid by the donor that
relates to appreciation in the partnership interest.
46
Basis for Partnership Interest
B. Effects of Liabilities.
1. Increases and Decreases in Liabilities. Two
changes in partnership liabilities are treated as
contributions of cash by the partners. The first
is an increase in the share of partnership
liabilities. The second is for a partner to assume
partnership liabilities in an individual capacity.
Two liability changes are treated as distributions
of cash to the partners. The first is a decrease in
the share of partnership liabilities. The second
is a decrease in the partner's individual liabilities
caused by the partnership's assumption of a
liability of the partner.
47
Basis for Partnership Interest
B. Effects of Liabilities.
1. Increases and Decreases in Liabilities.
……
A Partner's Share of Liabilities. A recourse loan is
the usual kind of loan for which the borrower
remains liable until the loan is paid. A
nonrecourse loan is one in which the lender may
sell the security if the loan is not paid, but the
borrower is not liable for any additional amounts.
Recourse liabilities are added to a partner's basis
only to the extent that the partner has a risk of
economic loss. Most, if not all, recourse liabilities
are allocated to general partners. Nonrecourse
debts are allocated to general and limited partners
based on their profit ratio.
48
Basis for Partnership Interest
B. Effects of Liabilities.
1. Increases and Decreases in Liabilities.
……
If the partnership has more than one general
partner, the economic risk of loss computation
entails computing a hypothetical loss and
allocating that loss to the general partners.
The hypothetical loss computation assumes the
partnership sells all its assets (including cash) for
the amount of nonrecourse liabilities.
If the partnership does not have nonrecourse
liabilities, the assets are deemed sold for zero
dollars.
The hypothetical loss then is subtracted from the
partners’ capital accounts to determine the
economic risk of loss.
49
Basis for Partnership Interest
C. Effects of Operations. A partner's basis is a
summary of contributions and the partnership's
liabilities, earnings, losses, and distributions.
Basis is increased for additional contributions
made to the partnership plus the distributive share
of a partner's current and prior years' taxable
income (both separately stated items and
partnership ordinary income) and tax-exempt
income of the partnership.
Basis is decreased (but not below zero) by
distributions from the partnership and the
partner's distributive share of losses of the
partnership (both separately stated items and
partnership ordinary loss) and expenditures that
are not deductible for tax purposes and that are
not capital expenditures.
50
Basis for Partnership Interest
C. Effects of Operations.
Any distributive share of loss that cannot
be deducted because of the basis limit is
simply noted in the partner's financial
records. It is not reported on the partner's
tax return, nor does it reduce the partner's
basis.
The losses can be carried forward until the
partner has positive basis again from
capital contributions, additional
partnership borrowings, or partnership
earnings.
51
8. Determine the limitations
on a partner's deduction
of partnership losses.
Special Loss Limitations
A. At-Risk Loss Limitations. Partnership losses
that can be taken as deductions are limited to
the at-risk basis. The at-risk basis is essentially
the same amount as the regular partnership
basis with the exception that liabilities increase
the at-risk basis only if the partner is at-risk with
respect to the amount. Under the at-risk rules,
the amount that a partner can deduct may be
considerably less than the amount under the
regular (Sec. 704(d)) basis limitation rules.
The at-risk rules do not apply to qualified
nonrecourse real estate financing. Partner is at
risk for his share of nonrecourse real estate
financing if all requirements are met.
53
Martin & Clark and their equal partnership are on a
calendar-year basis. An ordinary loss of $84,000
was sustained in 2010. The partners share profits
and losses equally.
At 12-31-10, Clark, who materially participates in
the partnership's business, had a basis of $36,000
for his partnership interest, before considering the
2010 loss.
On his individual income tax return for 2010, Clark
should deduct a (n):
a. Ordinary loss - $36,000
c. Ordinary loss - $36,000, capital loss - $6,000
b. Ordinary loss - $42,000
d. Capital loss - $42,000.
54
Ken & Liz each have a 50% interest in KeLi
Partnership. All use the calendar year.
In 2009, KeLi had a $30,000 loss. Ken's basis in
his partnership interest on 1-1-09 was $8,000.
In 2010, KeLi Partnership had a profit of $28,000.
There were NO other adjustments to Ken's basis
in the partnership in 2009 & 2010. What amount of
partnership income (loss) would Ken show on his
2009 & 2010 individual income tax returns?
2009
2010
a.
($8,000)
$0
b.
($8,000)
$7,000
c.
($15,000) $7,000
d.
($15,000) $14,000
IRS Exam
Flow through of loss of KeLi Ptshp
Total
Ken's basis
Loss - 2009
Ken's
2009
Share
Return
8,000
(30,000)
Limit on loss
Suspended Loss
Flow through of loss of KeLi Partnership
Total
Ken's basis
Loss - 2009
Limit on loss.
Suspended Loss
Ken's
2009
Share
Return
8,000
(30,000) (15,000)
(8,000)
Flow through of loss of KeLi Partnership
Total
Ken's basis
Loss - 2009
Ken's
2009
Share
Return
8,000
(30,000) (15,000)
Limit on loss.
(8,000)
Suspended Loss
(7,000)
8,000
Flow through of loss of KeLi Partnership
Ken's
2009
2010
Total
Share Return Return
Ken's basis
8,000
Loss - 2009
(30,000) (15,000)
Limit on loss.
(8,000) (8,000)
Suspended Loss
(7,000)
Net income-2010 28,000 14,000
Net income recognized by Ken
Flow through of loss of KeLi Partnership
Ken's
Total
Ken's basis
Loss - 2009
Share
2009
2010
Return Return
8,000
(30,000) (15,000)
Limit on loss.
(8,000) (8,000)
Suspended Loss
(7,000)
Net income-2010 28,000
14,000
Net income recognized by Ken
$ 7,000
Special Loss Limitations
B. Passive Activity Limitations. Passive activity
loss and credit limitations further limit the loss
that can be deducted is the Under Sec. 469, all
income is divided into (1) amounts derived from
passive activities; (2) active income such as
salary, bonuses and income from businesses in
which the taxpayer materially participates; and
(3) portfolio income (e.g., dividends and interest).
Generally, losses of a noncorporate partner from
a passive activity cannot be used to offset either
active income or portfolio income. Special rules
apply to passive losses of C corporations.
Both of the special loss limitations generally act
to severely curtail the use of partnership losses
at the partner level, much more than do the
general partnership basis rules of Sec. 704(d).
61
Bud is single and received wages of
$140,000 from IBM in 2010. Bud is a 50%
partner in a partnership engaged in a rental
real estate activity which generated a
$60,000 loss for the partnership. Bud was
an active participant in the rental real estate
activity. He had no other income.
How much of the partnership rental loss
may Bud deduct on his 2010 income tax
return? (Sec.
469(i))
a. $0 b. $5,000 c. $15,000 d. $25,000
62
Bud - Loss from rental activity.
Maximum loss write-off
Threshhold
Phase-out percentage
AGI- above threshhold
Reduction in max loss
Maximum write-off
Bud - Loss from rental activity.
Maximum loss write-off $25,000
Threshhold
100,000
Phase-out percentage
50%
AGI- above threshhold 40,000
Reduction in max loss
20,000
Maximum write-off
$5,000
Transactions Between Partner & Partnership
A. Sales of Property.
No loss can be deducted on the sale or exchange
of property between a partnership and a person
who directly or indirectly owns more than 50% of
the partnership's capital or profits interests.
Losses are also disallowed on sales or exchanges
of property between two partnerships in which the
same persons own, directly or indirectly, more
than 50% of the capital and profits interests.
Gain will be ordinary in a sale of property between
a partnership and a person who owns a
controlling interest. This rule only applies when
the property that is sold or exchanged at a profit
is not a capital asset in the transferee's hands.
65
9. Determine tax
consequences
of a guaranteed
payment.
Transactions Between a Partner and the Partnership
B. Guaranteed Payments.
A partner is not an employee of his partnership and most
fringe benefits are taxable to the partner. Partners, who
perform services for their partnership, are sometimes
compensated for these services through the use of
guaranteed payments.
Guaranteed payments includes more than just salary type
of payments. Guaranteed payments can also be made for
the use of invested capital that are similar to interest.
1. Determining the Guaranteed Payment. Sometimes the
guaranteed payment is expressed as a specific dollar
amount. Other times it is expressed as a guaranteed
minimum (that may or may not be in excess of the
partner's distributive share).
67
Transactions Between a Partner and Partnership
B. Guaranteed Payments.
2. Tax Impact of Guaranteed Payments.
Like salary & interest income, guaranteed
payments are always ordinary income to recipient.
The guaranteed payment is included in recipient's
tax year during which the partnership tax yearends and the partnership deducts or capitalizes
the payments.
For the partnership, the payment is treated as
though it were made to an outsider. If the service
is of a nature that it must be capitalized, the
guaranteed payment must be capitalized.
Otherwise the guaranteed payment is deductible
from ordinary income.
68
10. Explain requirements
for the holder of a
partnership interest
to be recognized as
a partner in a family
partnership.
Family Partnerships
A. Capital Ownership. Family partnerships allow
income from an investment to be spread among
family members having low marginal tax rates.
The question of whether a family member is a
partner is an issue that is frequently litigated.
Three tests must be met if a family member is to
be considered the owner of a capital interest in a
family partnership: (1) the partnership interest
must be a capital interest;
(2) capital must be a material income-producing
factor in the partnership's business activity; and
(3) the family member must be the true owner of
the interest.
70
11. Determine the allocation
of partnership income
between a donor and a
donee of a partnership
interest.
Family Partnerships
B. Donor-Donee Allocations of Income.
Partnership income must be properly
allocated between a donor and a donee in
order to be accepted by the IRS.
The donor must be allocated reasonable
compensation for services rendered to the
partnership.
Any remaining income must be allocated
based on relative capital interests.
72
On 1-1-Yr1, Mr. A sold 50% of his business
to his son B. The resulting partnership had
a profit of $100,000. Capital was a material
income producing factor.
Mr. A performed services worth $50,000,
which was reasonable compensation.
What is the maximum amount of income B
can report from the partnership for the
year? (Sec. 704(e))
a. $15,000
b. $30,000
c. $40,000
d. $75,000 e. $25,000
73
Allocation-capital investment is material
Profits before partner comp $100,000
Reasonable comp. to A
Reasonable comp. to B
Profit allocated to A & B
Ownership percentage
50%
Profit allocated to B
Profit & comp. allow. to A
74
Allocation-capital investment is material
Profits before partner comp $100,000
Reasonable comp. to A
(50,000)
Reasonable comp. to B
Profit allocated to A & B
Ownership percentage
$50,000
50%
Profit allocated to B
$25,000
Profit & comp. allow. to A
$75,000
75
Tax Planning Considerations
A. Timing of Loss Recognition.
Loss limitation rules provide a unique opportunity
for tax planning. Income can be projected for the
current and future tax years to determine when
losses can be used to the greatest advantage.
A partner can use a loss in the current year if there
is sufficient basis in the partnership interest.
If basis is not sufficient, an additional contribution of
capital can be made by the end of the year, or the
partner can convince the partnership to incur
additional partnership liabilities in order to obtain
the needed basis.
If it is desirable to defer the loss until a later year,
basis can be kept low so that the distributive share
of losses exceeds basis and the loss utilization is
deferred to a later tax year.
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12. Determine the
requirements for filing
a partnership tax
return.
Compliance and Procedural Considerations
A. Reporting to the IRS and the Partners.
1. Forms. Within 3 1/2 months after the end of the
partnership tax year, the partnership must file a
Form 1065 with the IRS. Appendix B contains a
completed Form 1065. A partnership return is an
information return and the partnership pays no
taxes. Included on Form 1065 are all the items of
income, gain, loss and deduction that are not
separately stated by the partners. Schedule K of
Form 1065 reports both the summary of ordinary
income and loss and the separately stated items.
Schedule K-1 is prepared for each partner and
reflects that partner's share of ordinary income or
loss and separately stated items.
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Compliance and Procedural Considerations
A. Reporting to the IRS and the Partners.
2. Sec. 444 Election & Required Payments. The election to
use a tax year other than a required year is made by filing
an election under Sec. 444 on Form 8716 by the earlier of
(1) the 15th day of the fifth month following the month that
includes the first day of the tax year for which the election
is effective, or (2) the due date of the income tax return
resulting from the Sec. 444 election. A partnership making
a Sec. 444 election needs to annually make a required
payment under Sec. 7519.
The required payment has the effect of collecting a deposit
from the partnership equal to the tax (at the highest
individual tax rate plus one percentage point) on the
partnership's deferred income. The required payment is
made when Form 8752 is filed along with a computational
worksheet, which is illustrated in the instructions to the
Form 1065. Refunds of excess required payments are also
obtained by filing the Form 8752.
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Compliance and Procedural Considerations
A. Reporting to the IRS and the Partners.
3. Estimated Taxes. A partnership pays no income taxes
so the partnership makes no estimated tax payments.
Partners must make estimated tax payments based on
their separate tax positions including their distributive
share of partnership income or loss for the current year.
Partner's self-employment income is reported on Form
1065. A general partner's self-employment income
includes both guaranteed payments of salary,
partnership ordinary income and loss and separately
stated items, but generally excludes capital gains and
losses, Sec. 1231 gains and losses, interest, dividends,
and rentals. This self-employment income is included by
the partners with their other self-employment income in
determining their self-employment tax liability. The
distributive share of partnership income allocable to a
limited partner is not self-employment income.
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Compliance and Procedural Considerations
B. IRS Audit Procedures. After the 1982 Tax Act,
partnership items are examined at the partnership level
instead of the partner level.
Every partner must report his distributive share of
partnership items in conformance with Schedule K-1 or
notify the IRS of the inconsistent treatment.
A tax matters partner is generally assigned to facilitate
communication between the IRS and the partners of a
large partnership, and to serve as primary representative
for the partnership.
A single court has jurisdiction to review all partnership
items in question for the litigated tax year and the
allocation of such items among the partners.
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The
End –
Part B
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