Chapter+14+Powerpoint+Slides - Chapter 14 Partnerships...

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Chapter 14PartnershipsPartnerships
Definition of PartnershipAn unincorporated association with two or more persons who associatefor a profit motive.square6For income tax purposes, partnerships are generally treated as pass-through entities, i.e., the partnership pays no taxes, and partnershipincome (loss) and separately stated items are allocated to each partneraccording to the partnership’s profit sharing agreement.square6The partners receive separate K-1 schedules from the partnership.Each K-1 reports each partner’s share of the partnership net profit andseparately reported income and expense items. Partners report theseitems on their own 1040 tax returns, even if none of the items havebeen distributed to them.Chapter 16, Exhibit 1
square6General partnership [GP].A GP has one or more general partners who is personallyliable for partnership debts; a general partner can be bankrupted by a malpractice judgmentbrought against the partnership, even though the partner was not personally involved in themalpractice.square6Limited liability partnership [LLP].An LLP is similar to a general partnership, exceptthat an LLP partner is not liable for any malpractice committed by the other LLP partners.square6Limited partnership [LP].An LP is comprised of at least one general partner and oftenTypes of Partnershipsmany 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.square6Limited liability company [“LLC”].An LLC is a state-registered association generallytaxed as a partnership if it “checks the box.” LLC members, like corporate shareholders,are not personally liable.Unlike limited partners, LLC members may participate inmanagement without risking personal liability.However, guaranteed payments are subjectto self-employment tax, along with the members’ share of ordinary income or loss fromthe LLC.Chapter 16, Exhibit 2a
Tax YearsMajority Interest Taxable Year.Partnerships are generally required to electthe same taxable year as their partners who represent a majority interest onthe first day of the partnership’s first tax year.Code Sec. 706(b).Five Percenters’ Common Tax Year.If there is no majority interest taxableyear, 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 principalpartners do not have the same taxable year, the partnership generally mustuse the calendar year.There are two exceptions, (1) minimum deferral rulesand (2) business purpose rules.Details regarding these exceptions arecovered in the text.Chapter 16, Exhibit 3
Accounting MethodsCash method.The cash method is available to partnerships thatdo not have a C corporation partner.The cash method however,MAY be used by partnerships with C corporation partners if thepartnership’s average annual gross receipts are $5 million or

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Term
Fall
Professor
fabioambrosio
Tags
Accounting, Corporation, basis, Types of business entity, partner, Code Sec

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