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Problem Area 4 -Partner Basis

Problem Area 4 -Partner Basis

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Problem Area 4 -Partner Basis

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  1. Problem Area 4 -Partner Basis • Partners initial basis is determine under Sec. 722. What is the general rule for determining basis? • Partner bases change as the partnership operates. Sec 705 discusses the general rules • What amounts increase partner bases? • What amounts decrease partner bases? • Can a partner have a negative basis? What is the Sec. 704(d) limitation? How does Sec. 465 interact

  2. Basis Adjustments - Sec. 705 • Bases is increased by • distributive share of taxable income of the partnership • distributive share of TEI of the partnership • additional contributions of capital • Bases are decreased, but not below zero by • distributions • distributive share of ptshp losses • distributive share of non-deductible expenditures. • How does Sec. 731 interrelate with Sec 705

  3. Other Basis Adjustments • Sec 752(a) - Increases in liabilities are treated as contributions: increase basis • Sec 752(b) - Decreases in liabilities are treated as distributions: decrease basis • How are recourse liabilities allocated? (Reg 1.752-1) • How are non-recourse liabilities allocated? (Reg 1.752-2)

  4. Allocation of Recourse Liabilities • Allocated based on economic risk of loss • How is economic risk of loss determined? • What is a constructive liquidation? • All liabilities payable in full • Partnership disposes of all property for no consideration • All items of income, gain, loss, or deduction are allocated to the partners • The partnership liquidates. • See Reg 1.752-2

  5. Non-recourse Liability Allocation - 1.752-3 • Partners share of non-recourse debt: • First calculate book minimum gain - See reg 1.704-2(b)(4)(d) • Minimum gain - compute any gain the partnership would realize if it disposed of property subject to that liability only for the value of the liability • Allocate book minimum in the manner in which book depreciation was allocated (usually loss sharing ratios) • Calculate tax/Sec. 704(c) minimum gain = same as above but subtract book minimum gain since it is already allocated. • Allocate tier three Sec. 704(c) gain • Residual of Non-recourse debt is allocated using profit sharing ratios.

  6. Problem Area 5Partnership Operations • Partnerships are not a taxable entity for Federal purposes • Some states do tax partnerships (e.g., Michigan), take care to investigate the rule for each state. • Partnerships calculate their income in the same manner as individual taxpayers but are not allowed personal exemptions. • After the partnership tax return is completed a partner receives a form K-1 that is used to prepare their respective tax returns. • Form K-1 provides a capital reconciliation along with each partners distributive share of partnership items.

  7. Separately Stated Items • Sec 702(a)requires separate statement of • Long & Short term capital gains and losses • Sec. 1231 G&L / Charitable contributions • Dividends -domestic corporations • Foreign taxes paid • Interest and Tax exempt interest • Net Income/loss of the partnership • The character set at the partnership level • What is the rationale behind Sec 702?