Chapter 16, Exhibit 3
Accounting Methods Cash method. The cash method is available to partnerships that do not have a C corporation partner. The cash method however, MAY be used by partnerships with C corporation partners if the partnership’s average annual gross receipts are $5 million or less in the three preceding years. The determination is made annually. Accrual Method. Once the partnership’s three-year average exceeds $5 million, it must use the accrual basis thereafter. Chapter 16, Exhibit 4
Separately Stated Items square6 Items other than partnership operating income and expenses must be separately stated. The reason for showing these items separately is that their ultimate tax treatment may vary from partner to partner. square6 Separately stated items are first computed at the partnership level (same computation method as with individuals). square6 Next, each partner’s distributive share of each separately stated item is reported on his Schedule K-1 of the partnership return. square6 Finally, the K-1 is sent to each partner who transfers his distributive share of Code Sec. 702(a)(8) taxable income, and each separately stated item listed, from the K-1 to the appropriate section of his individual return. For example, a distributive share of charitable contributions reported on K-1 is transferred to Schedule A of Form 1040. There, it is subject to certain AGI limitations of the partner, which will differ from that of the other partners. Chapter 16, Exhibit 7b
Items that must be separately stated include the following: square6 Code Sec. 1231 gain and loss square6 Code Sec. 1250 depreciation recapture (Code Sec. 1250, unlike Code Sec. 1245, must be separately stated because corporate partners may be subject to an additional recapture adjustment under Code Sec. 291) square6 Capital gains and losses square6 Dividends eligible for a corporate dividend-received deduction square6 Tax-exempt income and related expense square6 Investment income and related expense Separately Stated Items square6 Passive income and losses from rental and other nonoperating activities square6 Recovery items (e.g., tax refunds, recovery of bad debts) square6 Distributions of unrealized receivables or inventory that have substantially appreciated square6 Tax credits square6 Charitable contributions square6 Foreign income taxes paid or accrued square6 Depletion on oil and gas wells square6 Alimony payments square6 Other nonbusiness expenses Chapter 16, Exhibit 7c
square6 No gain or loss. Generally, Code Sec. 721 requires that no gain or loss is recognized if property is transferred to a partnership in exchange for a partnership interest. It does not matter whether the transfer is during partnership formation or after the partnership had already been formed.
- Fall '14
- Accounting, Corporation, basis, Types of business entity, partner, Code Sec.