lecture6 - Week Six Partnerships Formation and Operation...

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Unformatted text preview: Week Six Partnerships Formation and Operation Definition of a Partnership 19,001 Characteristics of a Partnership A partnership exists when there is an association of two or more persons who carry on as co-owners of a business for profit. Prior to 1997, an unincorporated entity was taxed as a corporation if the entity had more than two of the four corporate characteristics. Treasury has now issued the check-the-box regulations that allow unincorporated business entities to elect whether they want to be taxed as corporations or partnerships. Partner Defined. For tax purposes, a partner is any member of a partnership, including, of course, members of joint ventures, syndicates, pools, and like groups classified for tax purposes as partnerships. Partnership Agreements. Since the partnership form enables owners to make special allocations of certain income, gain, loss, deductions, or credits that are not possible under the C or S corporation forms, it is always desirable to have a written partnership agreement. However, the parties cannot by their agreement abrogate the effect of the tax law. Classification as a Partnership. Under the check-the-box regulations, business owners that have not incorporated may elect to be taxed as either a partnership (with two or more owners) or a C corporation. Exclusion from Partnership Treatment. The Commissioner may excuse certain partnerships from the necessity of filing a partnership return. This privilege is available to only a small number of unincorporated organizationsthose which are formed (1) for investment purposes only and (2) for the joint production, extraction, or use of property. Partnership Reporting 19,005 Partnership Tax Filing Form 1065 must be filed by the 15th day of the fourth month following the close of the partnerships tax year. Each partner receives a Schedule K-1, which shows that partners share of partnership items. Taxation of Partners. For income tax purposes, partners report these items on their tax returns, even if no distributions have been made to them. Partnership Accounting Concepts 19,025 Outside Basis Outside basis generally refers to a partners tax basis in her partnership interest. It is used mainly in the computation of gain or loss from partnership distributions and for determining the gain or loss from the sale of a partnership interest. The partners outside basis is increased by (1) his or her basis of property contributed, (2) his or her share of increasing partnership liabilities, and (3) every allocable type of income reported by the partnership whether it is taxable or tax-exempt. Downward adjustments to outside basis are required for (1) a partners share of decreasing partnership liabilities, (2) withdrawals of money and other property from the partnership, and (3) every allocable type of loss or expense reported by the partnership, whether ordinary or capital, deductible or disallowed....
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lecture6 - Week Six Partnerships Formation and Operation...

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