4. Limited Liability Partnerships (LLPs). Many states recognize LLP as a business form. The primary difference between a general partnership and an LLP is that a partner is not liable for damages resulting from failures in the work of other partners or of people supervised by other partners. LLPs can be taxed under the check-the- box regs as a partnership or as a corp. 5. Electing Large Partnerships. Partnerships that qualify as “large partnerships” may elect to be taxed under a simplified reporting arrangement. To qualify as a large partnership, the partnership must not be a service partnership and must not be engaged in commodity trading. Partnership must have at least 100 partners.
9 Overview of Taxation of Partnership Income A. Partnership Profits and Losses. A partnership is not a taxpaying entity and income earned by a partnership is not subject to two layers of federal income taxes. Each partner reports his share of the partnership's income, gain, loss, deduction and credit items as part of his regular tax return. The partnership files a Form 1065 [U.S. Partnership Return of Income], an information return, which provides the IRS with information about the partnership's income and its allocation to the partners.
2. Explain the tax results of a contribution of property or services in exchange for a partnership interest.
1. Nonrecognition of Gain or Loss. Formation of a partnership is governed by Sec. 721. When property is exchanged for a partnership interest, no gain or loss will be recognized by the partner or partnership. The partnership's basis in the property is the partner's basis increased by any gain recognized by the partner under Sec. 721(b).
14 Formation of a Partnership A. Contribution of Property. 2. Recognition of Gain or Loss. Exceptions to the general nonrecognition rule occur when liabilities are contributed in excess of the property's basis such that the partner would have a negative basis for his partnership interest (including his allocation of general partnership liabilities) immediately after the contribution, or where the partnership would be considered an investment company if incorporated (Sec. 721(b)).
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