C:9 Chapter Partnership Formation and Operation Learning Objectives After studying this chapter, the student should be able to: 1. 2. 3. 4. Differentiate between general and limited partnerships. Explain the tax results of a contribution of property or services in exchange for a partnership interest. Determine the permitted tax years for a partnership. Differentiate between items that must be separately stated and those that are included in ordinary income or loss for partnerships that are not electing large partnerships. Calculate a partner's distributive share of partnership income, gain, loss, deduction or credit items. Explain the requirements for a special partnership allocation. Calculate a partner's basis in a partnership interest. Determine the limitations on a partner's deduction of partnership losses. Determine the tax consequences of a guaranteed payment. Explain the requirements for the holder of a partnership interest to be recognized as a partner in a family partnership. Determine the allocation of partnership income between a donor and a donee of a partnership interest. Determine the requirements for filing a partnership tax return. 5. 6. 7. 8. 9. 10. 11. 12. Areas of Greater Significance Emphasis should be placed on the formation of a partnership and the reporting of partnership income. Areas of Lesser Significance C:IO9-1 In the interest of time, the instructor may determine that the following areas are best covered by student reading, rather than class discussion: 1. 2. 3. Tax planning considerations (timing of loss recognition). Loss limitations. Family partnerships. Problem Areas for Students The following areas may prove especially difficult for students: 1. 2. 3. Special allocations of partnership income. Effect of liabilities on a partner's basis. At-risk rules and passive activity limitations. Highlights of Recent Tax Law Changes For organization expenditures incurred after October 22, 2004, a partnership may elect to deduct the first $5,000 of these expenditures in the tax year it begins business. The partnership must reduce the $5,000 by the amount by which cumulative organizational expenditures exceed $50,000 although the $5,000 cannot be reduced below zero. Any remaining organizational expenditures can be amortized over a 180-month period beginning in the month it begins business. Under the 2004 Jobs Act, for tax years beginning after 2004, a partnership must report each partners share of qualified production activities income on the partners Schedule K-l. The deduction applies at the partner level. For the 50% salary limitation, each partner is allocated a share of the partnerships W-2 wages equal to the lesser of (1) the partners allocable share of such wages or (2) 6% (2x3% in 2005) of the qualified production activities income allocated to the partner. Proposed regulations were issued in May 1996 to amend the Sec. 7701 (and related regulations) classification scheme for business entities. These check-the-box regulations will permit partnerships to be taxed as C or S corporations or C or S corporations to be taxed as partnerships. These regulations were finalized in December 1996 effective for tax year
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- Fall '12