Week 1 Ch 21-22


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CHAPTER 21 PARTNERSHIPS LECTURE NOTES OVERVIEW OF PARTNERSHIP TAXATION 1. Partnerships are not treated as separate tax entities for Federal income tax purposes. a. All items of income, gain, loss, deduction, or credit pass through to the partners according to the partnership agreement. b. These pass through items are reported to each partner on a Schedule K-1. c. Partners report their share of partnership items on their separate tax returns. 2. Partnership tax return (Form 1065) is only an information return. a. However, the partnership makes numerous tax accounting elections on its tax return (e.g., cost recovery methods, whether to amortize business start-up costs, tax year selection, and adopting the cash or accrual method of tax accounting). b. Such elections are important because they affect the timing and amount of items reported by the partner. 3. Two conflicting concepts govern partnerships; the entity and the aggregate concepts. a. Under the entity concept, partnerships are treated as independent entities, separate and apart from the aggregate of its partners. b. Under the aggregate or conduit concept, a partnership is a “common pool” to which each partner contributes capital or services in the pursuit of profit. FORMS OF DOING BUSINESS- FEDERAL TAX CONSEQUENCES 4. Partnerships and S corporations provide tax advantages over regular C corporations. a. Partnerships and S corporations are flow-through or pass-through entities because owners are taxed on their proportionate share of the entity’s taxable income; thus avoiding double taxation because they are not separate taxable entities. b. Administrative and filing requirements are usually simple for a partnership. c. Partnership offers planning opportunities not available to C or S corporations. For example: 1
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(1) Both C and S corporations have rigorous allocation and distribution require- ments. Partnership allocations and distributions are not required to be proportionate. (2) Gains on appreciated assets are recognized at entity level for both C and S corporations upon liquidation. Partnership liquidation is generally tax- free. WHAT IS A PARTNERSHIP? 5. Partnership is defined under common law as a contractual relationship between two or more persons who join together to carry on a trade or business, each contributing money, property, labor, or skill, and with the expectation of sharing in the profits and losses. a. For tax purposes a partnership includes syndicates, groups, pools, joint ventures, or other unincorporated organizations. b. Types of entities that may be treated as partnerships for tax purposes are: general partnerships, limited liability partnerships, limited partnerships, limited liability companies, and recently developed limited liability limited partnerships. c.
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