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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

PARTNERSHIP TAXATION

PRESENTED BY

DR. AA NEIDERMEYER

objectives
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 taxation3
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
partnership definition
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
scope of partnerships
SCOPE OF PARTNERSHIPS
  • LIMITED PARTNERSHIPS AND LIMITED LIABILITY COMPANIES ARE TREATED AS PARTNERSHIPS FOR TAX PURPOSES
partnership formation
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
rules exceptions
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
partner s basis
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
reporting of income
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
income reporting limitation
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
distributions and guaranteed payments
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
guaranteed payments
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
selection of a tax year
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
termination of partnership
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
transactions partner and partnership
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%
at risk rule
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
limited liability companies
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
limited liability companies18
LIMITED LIABILITY COMPANIES
  • DISADVANTAGES:
    • LIMITED LEGAL REFERENCE MATERIAL
    • MOST STATES REQUIRE AT LEAST TWO OWNERS