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PARTNERSHIP TAXATION PowerPoint Presentation
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PARTNERSHIP TAXATION

PARTNERSHIP TAXATION

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PARTNERSHIP TAXATION

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  1. PARTNERSHIP TAXATION PRESENTED BY DR. AA NEIDERMEYER

  2. 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

  3. 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

  4. 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

  5. SCOPE OF PARTNERSHIPS • LIMITED PARTNERSHIPS AND LIMITED LIABILITY COMPANIES ARE TREATED AS PARTNERSHIPS FOR TAX PURPOSES

  6. 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

  7. 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

  8. 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

  9. 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

  10. 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

  11. 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

  12. 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

  13. 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

  14. 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

  15. 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%

  16. 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

  17. 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

  18. LIMITED LIABILITY COMPANIES • DISADVANTAGES: • LIMITED LEGAL REFERENCE MATERIAL • MOST STATES REQUIRE AT LEAST TWO OWNERS