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PARTNERSHIP TAXATION PRESENTED BY DR. AA NEIDERMEYER OBJECTIVES TO KNOW PARTNERSHIP DEFINITION TO UNDERSTAND BASIC TAX RULES TO UNDERSTAND TAX REPORTING TO BE AWARE OF SPECIAL TREATMENTS TO KNOW ADV/DISADV OF LLCs PARTNERSHIP TAXATION RETURNS ARE INFORMATIONAL ONLY

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Partnership taxation l.jpg

PARTNERSHIP TAXATION

PRESENTED BY

DR. AA NEIDERMEYER


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OBJECTIVES

  • TO KNOW PARTNERSHIP DEFINITION

  • TO UNDERSTAND BASIC TAX RULES

  • TO UNDERSTAND TAX REPORTING

  • TO BE AWARE OF SPECIAL TREATMENTS

  • TO KNOW ADV/DISADV OF LLCs


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PARTNERSHIP TAXATION

  • RETURNS ARE INFORMATIONAL ONLY

  • INCOME IS CLASSIFIED BY TYPE AND ALLOCATED TO PARTNERS

  • INCOME IS TAXABLE TO PARTNERS EVEN THOUGH THEY DO NOT HAVE TO RECEIVE SAME

  • PARTNERSHIPS MAKE ELECTIONS


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PARTNERSHIP DEFINITION

  • A SYNDICATE, GROUP, POOL, JOINT VENTURE, OR OTHER UNINCORPORATED ORGANIZATION THROUGH OR BY MEANS OF WHICH ANY BUSINESS IS CARRIED ON AND WHICH IS NOT CLASSIFIED AS A CORPORATION, TRUST OR ESTATE

  • BUSINESS ACTIVITY IS REQUIRED


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SCOPE OF PARTNERSHIPS

  • LIMITED PARTNERSHIPS AND LIMITED LIABILITY COMPANIES ARE TREATED AS PARTNERSHIPS FOR TAX PURPOSES


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PARTNERSHIP FORMATION

  • GENERAL RULE: NO GAIN OR LOSS IS RECOGNIZED BY A PARTNERSHIP OR ANY OF ITS PARTNERS WHEN PROPERTY IS CONTRIBUTED TO A PARTNERSHIP IN EXCHANGE FOR AN INTEREST

  • RULE APPLIES ON INITIAL AND SUBSEQUENT CONTRIBUTIONS


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RULES EXCEPTIONS

  • RECEIPT OF PARTNERSHIP INTEREST CONSTITUTES INCOME IF RECEIVED FOR RENDERING OF SERVICES

  • IF ENCUMBERED PROPERTY IS TRANSFERRED, A GAIN WILL BE RECOGNIZED IF LIABILITY EXCEEDS BASIS OF PROPERTY TRANSFERRED


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PARTNER’S BASIS

  • ORIGINAL BASIS IS EQUAL TO THE BASIS OF THE PROPERTY TRANSFERRED PLUS CASH CONTRIBUTED TO THE PARTNERSHIP

  • IF A GAIN WAS RECOGNIZED, BASIS IS INCREASED BY THIS AMOUNT

  • IF A LIABILITY WAS ASSUMED, BASIS IS REDUCED BY THIS AMOUNT


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REPORTING OF INCOME

  • TWO-STEP REPORTING REQUIRED

  • SEPARATE REPORTING FOR: CAPITAL GAINS AND LOSSES, SECTION 1231 GAINS AND LOSSES DIVIDENDS, INTEREST INCOME, CASUALTY GAINS AND LOSSES, TAX-EXEMPT INCOME, RETIREMENT CONTRIBUTIONS, CHARITABLE CONTRIBUTIONS AND MOST CREDITS

  • ORDINARY INCOME IS REPORTED NEXT


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INCOME REPORTING LIMITATION

  • PARTNERS MUST RECOGNIZE THE AMOUNTS REPORTED ON THEIR INDIVIDUAL K-1 FORMS FROM THE PARTNERSHIP

  • PARTNER’S DEDUCTIBLE LOSS FOR THE YEAR CANNOT EXCEED HIS/HER BASIS IN THE PARTNERSHIP

  • UNUSED LOSSES-CARRIED OVER


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DISTRIBUTIONS AND GUARANTEED PAYMENTS

  • NORMALLY WILL NOT RESULT IN A COMPLETE TERMINATION OF THE PARTNER’S INTEREST

  • GENERALLY, NO GAIN OR LOSS UNLESS BASIS IS ZERO

  • BASIS OF PROPERTY RECEIVED IS SAME A PARTNERSHIP’S BASIS


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GUARANTEED PAYMENTS

  • PAYMENTS MADE FOR SERVICES RENDERED OR FOR USE OF PARTNER’S CAPITAL AND WITHOUT REGARD TO PARTNERSHIP INCOME

  • PAYMENTS ARE ORDINARY INCOME TO THE PARTNER AND DEDUCTIBLE TO THE PARTNERSHIP


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SELECTION OF A TAX YEAR

  • MAY SELECT A FISCAL YEAR IF JUSTIFIED ACCORDING TO CODE

  • USUALLY ADOPTS TAX YEAR OF MAJORITY PARTNERS

  • IF NOT ABOVE, ADOPT TAX YEAR OF ALL PRINCIPAL PARTNERS

  • IF NOT ABOVE, LEAST DEFERRAL METHOD


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TERMINATION OF PARTNERSHIP

  • IF BUSINESS ACTIVITY CEASES

  • IF WITHIN A 12 MONTH PERIOD, THE SALE OR EXCHANGE OF 50% OR MORE OF THE TOTAL INTERESTS IN THE PARTNERSHIP OCCURS


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TRANSACTIONS: PARTNER AND PARTNERSHIP

  • PARTNER IS USUALLY REGARDED AS AN OUTSIDE PARTY

  • HOWEVER, LOSSES ARE DISALLOWED FOR PARTNERS WITH >50% EQUITY IN PARTNERSHIP

  • GAINS TAXED AS ORDINARY INCOME IF O/S >50%


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AT-RISK RULE

  • LOSSES LIMITED TO AT-RISK AMOUNTS

  • NONRECOURSE LIABILITY: NO PERSONAL LIABILITY BEYOND EQUITY IN PROPERTY PLEDGED

  • ENCUMBERED PROPERTY: ADJUSTED BASIS MINUS NONRECOURSE DEBT ON PROPERTY

  • UNUSED LOSSES MAY CARRYOVER


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LIMITED LIABILITY COMPANIES

  • ADVANTAGES:

    • CONDUIT ENTITY

    • NO GENERAL PARTNER REQUIRED

    • MAY PARTICIPATE IN MANAGEMENT

    • O/S IS NOT A SECURITY

    • INCOME/LOSSES RETAIN CHARACTER

    • NO LIMIT ON # OF OWNERS


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LIMITED LIABILITY COMPANIES

  • DISADVANTAGES:

    • LIMITED LEGAL REFERENCE MATERIAL

    • MOST STATES REQUIRE AT LEAST TWO OWNERS


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