Elections, Accounting Periods, and Accounting Methods
Determining a Partnership’s Year End
Accounting Methods – partnerships may use the accrual method or the cash method unless they have C corporation partners who cannot use the cash method____. Elections, Accounting Periods, and Accounting Methods
Reporting Partnership ResultsA partnership does not pay tax. Instead, partners report their share of the partnership’s ordinary income and loss, and separately stated items on their own tax returns.Ordinary income is all items of income and loss that are not required to be __separately stated______. Separately-stated items are those items of income or loss that may be treated differentlyby different partners and that may not be taxed as _ordinary income____.•E.g., if a partnership has a capital loss, whether/how much of that capital loss can be deducted by each partner depends on whether they have capital gains. •Common separately stated items include: interest income, capital gains and losses, §1231gains and losses, charitable contributions, guaranteed payments, tax-exemptincome, non-deductible expenses
Reporting Partnership ResultsGuaranteed PaymentsA guaranteed payment is a payment for __services performed__by a partner or for the use of the partner’s __capital___. They cannot be contingenton taxable income earned.Guaranteed payments are deductedin computing ordinary income for the partnership but are separately stated to the partners who receive them.Partners receiving guaranteed payments treat them as ordinary income.
Reporting Partnership ResultsSelf-Employment TaxIndividuals who are partners may be responsible for paying self-employment taxes in addition to income taxeson their share of earned income for partnerships._Partnerships_______•GPs – self-employment income =guaranteed payments for services + share of ordinary income•LPs – self-employment income = guaranteed payments for services__LLCs______•Managing members - guaranteed payments for services + share of ordinary income•Non-managing members - self-employment income = guaranteed payments for services
Reporting Partnership ResultsAllocating Partners’ Shares of Income and LossEach item of income and loss is allocated to each partner based on his/her _profit sharing ratio__Allocations can deviate from capital sharing ratios if partners agree to “_special allocations” and the purpose of the allocation is something other than _tax avoidance___. For example,if a partner contributes rental property to a partnership, the partners could agree to allocate all income from the property to that partner
Reporting Partnership ResultsPartnership Compliance IssuesPartnerships file Form 1065. This is an _informational __return; no tax is due with this return.•Due 15thday after 3rdmonth (e.g., March 15 for calendar year partnerships)•Page 1 computes ordinary income or loss•Schedule K starts with ordinary income and lists separately stated itemsEach partner receives Schedule K-1, which shows his/her share of each partnership item shown on Schedule K.
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