[REG] Partnership

Taxable year
Required tax year
    The same tax year of more than 50% of partners
Optional tax year
    1)Valid business purpose (natural business year)
    : for the last 3 consecutive years, gross receipts of the last 2months are at least 25% of annual gross receipts
    2) Up to 3 months deferral (9/30, 10/31, 11/30 if required tax year is 12/31)
Due date
    -  March 15th, Form 1065
    - Extension separate form should be filed to get an automatic 6month filing extension 
 
Method
Accrual- general
Cash 
1) small Co, 25M 이하
2) Personal service Co.
* cannot use cash method, C corp partner, ave annual gross receipt 3yrs exceed 25M
* cannot be used if inventory is major income producing factor
 
 
Tax return
not subject to income tax, but file F1065
 
Reporting partnership income, 1065, sch K-1
- Ordinary business income or loss: Biz income - Biz exp - Guaranteed payments
- Guaranteed payments: reasonable compensation paid to a partner for services provided(ex.Salary)
   Partnership: biz exp, Partner:ordinary and taxable income
   *Not included in Qualified Biz income(QBI) deduction

	1065	K	K-1
Ordinary business income or loss	0	0	0
Guaranteed payments to partners(may include insurance premium of Ps)	0	0	0(내가 받았을경우만 해당)
Net rental real estate income or loss		0	0
Interest income		0	0
Dividend income		0	0
Capital gains and losses		0	0
Net section 1231 gain(loss)		0	0
Charitable contributions		0	0
Section 179 expense deduction		0	0
Investment interest expense		0	0
Partner's health insurance premiums(included as part of guaranteed payments)	0	0	0
Retirement plan contributions for employees	0
Retirement plan contributions for partners		0	0
Tax credits(reported by the partnership but claimed by partners		0	0

* Qualify dividend는  Ordinary dividend 안에 포함됨
 
 
Organizational Expenditures and Start-up Costs
- Deduct up to 5K in the first year, amort the rest over 15yrs
- Threshold 50K~55K

Organizational exp	Start-up Cost
legal service fees in drafting the agreement, accounting services, partnership filing	Training costs, advertising costs, testing costs prior to the opening of the biz

* Exclude syndication costs (offering materials, cost associated with raising capital)
 
 
 
Partner's Basis in partnership (Stock B + Debt B)
- Recourse debt: Debt, partner has personal liability
- Nonrecourse debt: partner's share of partnership debt secured by property

increase in basis	decrease in basis
additional contributions Income and gain items Increase in partnership debt * includes tax-exempt income	Distributions Loss and deduction items Decrease in partnership debt * nondeductible expenses

* any suspended losses due to insufficient tax basis remaining when the partner disposes of his or her partnership interest as lost
 
Initial or beginning capital account
(+) share of ordinary income/Loss
(+) share of separately reported inc(loss)
      Non taxable inc(Non deductable exp)
 Capital Account before distributions
 <Distributions>                                 
12/31 Partner's ending capital AC
(+) Partner's Basis in partnership
12/31 partner's Basis in partnership
 
Partnership Formation
no gain or loss recognized, in exchange for an interest in a partnership
  * Partner, Gain recognized IF
  1) exchange for a service rendered
  2) Liability assumed by partnership - partner's share of liability > partner's Basis
  3) Boot received
 
Initial Basis in partnership interest
   Cash + TB of Property
  (+) Gain recognized
  (+) Boot Paid (SH%)
  (-) Boot Received(100%)
  Initial Basis in partnership 
 
Property contributed to the partnership
  - No gain or loss by partnership
  - Partnership's bais = transfer basis + gain recog
  - Partnership's holding period: includes holding period of the partner

 

 
 
 
 
Partnership Income and Loss
Ordinary income and deductions
1) All income and deductions other than separately reported income and deductions
2) Guaranteed payment to partners for service rendered(Salary)
   - ordinary deductions by partnership(F1065), separately reported income to partners(sch K)
   - Guaranteed payments > self-employment income(1040, Sch E), partners are not EE
   - EE fringe benefits provided to partners
3) Syndication fees(Stock issue cost for C, S corp)
   - Expenses for issuing, marketing, sale of partnership int(broker's commission)
   - capitalized, can be deducted in the year of liquidation
  
Separately reported income and deductions (sch K)
1) income deductions pass through to partner-level
2) Net income/loss from rental activity
3) Interest, dividend, royalty income
4) Capital gains/losses
5) Sec.1231 gain or losses
6) Charitable contributions
7) Sec.179 deductions for recovery property $1,050K
8) Investment expenses including int
9) Foreign income taxes paid
10) Non-taxable income/ Non-deductible expenses

 
 
Partnership agreement
- Partner's share of income or loss is determined by the partnership agreement
- Special allocation related to disposing of contributed property
  1) G/L first allocated to the contributing partner for FMV - Basis at the time of contribution
  2) The remaining G/L is allocated to partners based on profit or loss ratios

 
3) Partnership income allocation in case of ownership change
    Entry of a new partner, liquidation, or sale of partnership int
   - inc allocated to partners based on daily ownership %

 
 4) Partner's loss limitation
Partner's share of partnership loss deductible extent of partner's basis
 - Basis is adjusted in the following order  
   (+) ordinary income + separately reported income 
   (+) P's share of recourse and non-recourse liabilities
   (-) Decrease basis for partnership distribution
 
 *recourse loan
Land의가치가 80으로 떨어지면 20만큼 은행에 더 주어야함
non-recourse loan의 경우 Land만 넘기면 끝남

 
 
 - Unused losses carried forward, deducted when the basis is increased
   Beg basis in partnership
   (+) Share of partnership ordinary income
   (+) Share of separately reported income
   (+) Share of partnership liability
   (-) distribution
       Partner's basis for loss
 
Deduction is also limited to the partner's at-risk basis
  - Partner's at-risk basis: capital account + partner's share of recourse liabilities (담보를 뺏기고도 갚아야하는 부채)
  - Unused losses carried forward, deducted when the basis is increased
 
Passive activity loss limitations
- passive activity loss is deductible only with passive activities
- partner can deduct up to $25K, rental loss partner actively participates in partnership(own 10% of P's int)
 
Related party transaction
transaction bet partnership + partner with more than 50% int in the partnership
- loss realized in related party transaction is not recognized
- if gain, offset to the loss not recognized from related party transaction
 
Sale of partnership interest
- Gain: ordinary income, Sec 751 asset
  * sec751: unrealized receivables, inventory and sec1245, 1250 gain
 
Proportional(pro rata) partnership distribution
- Amount of distribution: cash + partnership's basis in distributed property, no G/L is recognized
- partners's basis in distributed property = partnership's B
- partner's G/L as a result of a distribution

 
- Distribution of multiple properties
Basis of property distributed allocated to inventory and unrealized receivables
Any remaining B is allocated among other properties distributed to the partner in proportions to assets before distribution

 

 
 
Payments made to a retiring or deceased partner
- generally Capital G/L to the partner
- payments made of a personal service > ordinary income to the partner
 
 
Deduction of Qualified Business Income(below-the-line deduction)
- Owners in pass-through entities(sole-proprietorship, S corp, Partnership, limited liability company) can exclude 20% of their qualified biz income
- QBI excludes investment income, salary paid by Scorp, guaranteed payment paid by partnership
- deduction of 20% QBI is limited to 20% taxable income over net capital gain and qualified dividends
- 20% business deduction reduces individual taxpayers' taxable income, not AGI(below-the-line deduction)
-  individuals with taxable income less than $167K are eligible for the full 20% deduction

 
 
Effect on Basis

	C	S	P	LLC
Liability	X	X	+	X
Lia guaranteed letter	X	X	+	+

 
FMV: C, S
Basis: P, LLC