6th Lecture Allocation of Partnership Income among Partners - Pass Thru Entities ACCT 6260 Operations Basis Module 2nd Lecture ALLOCATION OF PARTNERSHIP

6th Lecture Allocation of Partnership Income among Partners...

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Pass Thru Entities ACCT 6260 Operations & Basis Module 2 nd Lecture ALLOCATION OF PARTNERSHIP INCOME AMONG THE PARTNERS Readings: IRC § 704(a) and (b) Reg. § 1.704-1(b) 1. Introduction Although the partnership is a tax reporting entity that files Form 1065 with the IRS in order to fulfill this obligation, the partnership is not a tax paying entity. Using the information accumulated on Schedule K of Form 1065, tax items are allocated to the partners via Schedule K-1s. The partners report and are taxed on items allocated to them on schedule K-1. Income allocated to individual partners is often referred to as a partner’s “distributive share of partnership income.” A partner’s distributive share of income is not necessarily the same amount as income actually distributed. Partners are taxed on their distributive share of income whether actually received or not. Partnerships have some latitude in determining how to allocate income among the partners with certain limitations: Code § 704(b) requires allocations to have “Substantial Economic Effect,” Code § 704(c) requires pre-contribution gain or loss (built-in-gain or loss) to be allocated to the partner who contributed the property creating the gain or loss, Code § 704(d) prevents a partnership from allocating income to partners when the income was earned prior to the partner joining the partnership, and Code § 704(e) limits the ability of a family partnership to allocate income from a service providing partner to a family member partner who did not provide services. This lecture will focus on the rules of IRC § 704(b). 2. Effect of Partnership Agreement 1
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