Chapter 14 Partnerships
Definition of Partnership An unincorporated association with two or more persons who associate for a profit motive. square6 For income tax purposes, partnerships are generally treated as pass- through entities, i.e., the partnership pays no taxes, and partnership income (loss) and separately stated items are allocated to each partner according to the partnership’s profit sharing agreement. square6 The partners receive separate K-1 schedules from the partnership. Each K-1 reports each partner’s share of the partnership net profit and separately reported income and expense items. Partners report these items on their own 1040 tax returns, even if none of the items have been distributed to them. Chapter 16, Exhibit 1
square6 General partnership [GP]. A GP has one or more general partners who is personally liable for partnership debts; a general partner can be bankrupted by a malpractice judgment brought against the partnership, even though the partner was not personally involved in the malpractice. square6 Limited liability partnership [LLP]. An LLP is similar to a general partnership, except that an LLP partner is not liable for any malpractice committed by the other LLP partners. square6 Limited partnership [LP]. An LP is comprised of at least one general partner and often Types of Partnerships many limited partners. Limited partners may not participate in the management of the LP, and their risks of loss are restricted to their equity investments in the LP. square6 Limited liability company [“LLC”]. An LLC is a state-registered association generally taxed as a partnership if it “checks the box.” LLC members, like corporate shareholders, are not personally liable. Unlike limited partners, LLC members may participate in management without risking personal liability. However, guaranteed payments are subject to self-employment tax, along with the members’ share of ordinary income or loss from the LLC. Chapter 16, Exhibit 2a
Tax Years Majority Interest Taxable Year. Partnerships are generally required to elect the same taxable year as their partners who represent a majority interest on the first day of the partnership’s first tax year. Code Sec. 706(b). Five Percenters’ Common Tax Year. If there is no majority interest taxable year, the partnership must use the same year as that of the principal partners, i.e., those owning five percent or more interest in either profits or capital. Calendar Tax Year. If there is no majority interest tax year and the principal partners do not have the same taxable year, the partnership generally must use the calendar year. There are two exceptions, (1) minimum deferral rules and (2) business purpose rules. Details regarding these exceptions are covered in the text.
- Fall '14
- Accounting, Corporation, basis, Types of business entity, partner, Code Sec.