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Balance Sheet Basics: Assets, Liabilities, and Equity

Learn the fundamentals of balance sheets, including the calculation of assets, liabilities, and partner equity. Understand how to analyze balance sheet data and the impact on corporate and partnership tax.

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Balance Sheet Basics: Assets, Liabilities, and Equity

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  1. A537 - Corporate & Partnership Tax Instructor: Dwight Drake

  2. Balance Sheet Basics Assets = Liabilities + Partner Equity Assets – Liabilities = Partner Equity Assets – Partner Equity = Liabilities A537 - Corporate & Partnership Tax Instructor: Dwight Drake

  3. Balance Sheet Basics Year 1 Year 2 Year 3 Assets Cash 100,000 50,000 40,000 Inventory 200,000 220,000 180,000 ARs 300,000 250,000240,000 Total 600,000 520,000 460,000 Liabilities 400,000 440,000 530,000 Partner Equity 200,000 80,000(70,000) Total Liabilities & Equity 600,000 520,000 460,000 Income (Loss) For Year 0 (120,000) (150,000) A537 - Corporate & Partnership Tax Instructor: Dwight Drake

  4. Basis 704 (d) Limitation • Easiest of the three hurdles • Each partner’s share of aggregate losses of entity from all activities compared to partner’s outside basis. If less, you home free. If more, excess carried over. • Remember 752 basis twist for partnership liabilities. This usually saves the day by increasing outside basis. A537 - Corporate & Partnership Tax Instructor: Dwight Drake

  5. At-Risk 465 Limitation • Theory: One should not get loss for money that he or she will never lose. Must really be “at-risk” • Compare partner’s allocable loss from each activity against partner’s “at-risk” amount on that activity. If loss less, you home free. If loss greater, carry forward. • “At-Risk” amount is amounts contributed to activity and debt for which partner is personally liable and partnership’s recourse debt. Debt is “recourse” if creditor can sue partner under state law and borrowed from person who has no interest in activity. • Big exception: Qualified non-recourse financing -Obtained from commercial lender or government - Holding of real estate is the activity - No one personally liable - Debt not convertible A537 - Corporate & Partnership Tax Instructor: Dwight Drake

  6. Basis & At-Risk Comparison • Two Huge Differences: • Basis is applied on aggregate net loss of partnership; At-Risk is applied separately to each activity of the partnership. • Basis includes all liabilities of partnership, including all non-recourse liabilities. At-risk includes only recourse liabilities. • Thus, for at risk, what is “recourse” becomes a big deal. • - What if only one partner liable for debt? • - What if other partner not liable directly to creditor, but agrees to indemnify party who is liable if that partner ever has to pay? • - What if indemnifying partner can cancel indemnity at any time activity is still solvent? A537 - Corporate & Partnership Tax Instructor: Dwight Drake

  7. Non-Recourse Debt Exception Magic Year 1 Year 2 Year 3 Assets Cash 100,000 50,000 40,000 Real Estate 3,000,0002,750,0002,500,000 Total 3,100,000 2,800,000 2,540,000 Non-recourse debt 3,050,000 3,050,000 3,050,000 Partner Equity 50,000(250,000)(490,000) Total Liabilities & Equity 3,100,000 2,800,000 2,540,000 Income (Loss) For Year 0 (300,000) (240,000) A537 - Corporate & Partnership Tax Instructor: Dwight Drake

  8. A537 - Corporate & Partnership Tax Instructor: Dwight Drake

  9. A537 - Corporate & Partnership Tax Instructor: Dwight Drake

  10. A537 - Corporate & Partnership Tax Instructor: Dwight Drake

  11. A537 - Corporate & Partnership Tax Instructor: Dwight Drake

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