Chapter 20 - Income Taxation Chapter 20: Alternative Forms...

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Unformatted text preview: Income Taxation Chapter 20: Alternative Forms of Business Alternative PARTNERSHIPS Elements of a Partnership Association of 2 or more persons Implies consensual agreement Agreement oral or written Operate a business as co­owners Ongoing business distinguished from one­time joint venture Profit motive Taxation of Partnerships Partnership is NOT treated as a taxable entity Income and losses are reported directly by the partners Partnership files an information tax return Taxation of Partnerships Each partner pays taxes on his or her distributive share Distributive share is determined in accordance with the partnership agreement IRS will generally abide by the agreement Taxation of Partnerships Partnership’s income retains its character in the hands of the partners Interest in a partnership is treated as property that can be bought and sold for federal income tax purposes. If sold can have capital gain or loss Compensation Packages for Compensation Partnerships Partnerships Owners of unincorporated businesses are not considered employees Guaranteed Payments represent sums paid to a partner, regardless of whether the partnership has income for a given period Compensation Packages for Compensation Partnerships Partnerships Tax benefits are unavailable for business contributions on behalf of both proprietor or partners Contributions represent taxable income to the proprietor or partner Example ­ Unincorporated business may deduct contributions to a group life insurance plan only if contributions are made on behalf of non­owner employees Partner’s Basis Deductibility of partnership losses are limited to the basis in the partnership Partners exchange cash or property for partnership interest Initial basis = adjusted basis in the property contributed Partner’s Basis If contribution is cash initial basis is the amount of the cash If contribution is property the basis is equal to adjusted basis at the time of contribution If contribution is services the basis is equal to the fmv of the services rendered­compensation Partnership Operations Impact on Partner’s Cost Basis Increase Basis Contributions by partner of cash or property Partnership income Increase­Partnership indebtedness Partnership Operations Impact on Partner’s Cost Basis Decrease Basis Distributions to partner Partnership losses Decrease­Partnership indebtedness Terminating A Partnership Step 1: Dissolution Step 2: Winding up partnership affairs Step 3: Termination of the business Key Partnership Terms: Unrealized Receivables ­Uncollected fees and other rights to business income Goodwill ­The monetary worth of a business’s reputation and relationships with its clients or customers Inventory Limited Liability Partnerships Basic Characteristics Formed under enabling state law Limited liability for all partners Taxed as partnerships for federal income tax purposes Easy conversion from partnership to L.L.P. Limited Liability Companies Basic Characteristics Formed under enabling state law Limited liability for all members Generally taxed as partnerships for federal income tax purposes Check­the­box regulations Conversion issues (unforeseen tax consequences) Limited Liability Companies Basic Characteristics Members can be active in management Restricted ownership transfer At death, most LLCs allow a vote to continue or not Single to unlimited membership Different classes of ownership Family Limited Partnerships Limited Partnership comprised of family members (i.e., individuals who are closely related through blood, adoption, or marriage). Parents are the General Partners Children are the Limited Partners Family Limited Partnerships G e n e ra l P a rtn e r H u s b a n d a n d W ife 2% F a m ily L im it e d P a r t n e r s h ip A s s e t s P r o t e c t e d fr o m L a w s u it s a n d C la im s i. e . , C a s h , R e a l E s t a t e , I n v e s t m e n t s L im it e d P a r t n e r s C a n b e H u s b a n d a n d W i f e ; C h i l d r e n ; L i v i n g T r u s t ; o r C h i l d r e n 's T r u s t 98% ...
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This note was uploaded on 06/06/2011 for the course ACE 346 taught by Professor Peter during the Spring '11 term at University of Illinois, Urbana Champaign.

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