Term
| PARTNERSHIP FORMATION AND TAX YEAR - Overview |
|
Definition
Realized gain or loss is not generally recognized by a partner when a partnership
interest is received in exchange for property contributed to the partnership unless boot is received. |
|
|
Term
| PARTNERSHIP FORMATION AND TAX YEAR - Contributed Property |
|
Definition
A partner’s basis in contributed items is exchanged for basis in the partnership.
interest received, adjusted for gain recognized and liabilities. |
|
|
Term
| PARTNERSHIP FORMATION AND TAX YEAR - Contributed Property |
|
Definition
| When a partner contributes property subject to a liability , or the partnership assumes a liability of the contributing partner, the partner is treated as receiving a distribution of money from the partnership in the amount of the liability. A distribution reduces the partner’s basis in the partnership interest. |
|
|
Term
| PARTNERSHIP FORMATION AND TAX YEAR - Contributed Property - Recognized Gain |
|
Definition
To the extent liabilities assumed by the partnership exceed the
partner’s aggregate AB in all property contributed, the partner recognizes gain. |
|
|
Term
| PARTNERSHIP FORMATION AND TAX YEAR - Contributed Services |
|
Definition
| A partner who receives a partnership interest in exchange for services recognizes compensation income equal to the FMV of the partnership interest. |
|
|
Term
| PARTNERSHIP FORMATION AND TAX YEAR - Partnership’s Gain |
|
Definition
| The partnership realizes neither gain nor loss when it receives contributions of money or property in exchange for partnership interests. |
|
|
Term
| PARTNERSHIP FORMATION AND TAX YEAR - Partnership’s Basis in Contributed Property |
|
Definition
| The partnership’s basis in contributed property is equal to the contributing partner’s AB in the property immediately before contribution increased by any gain recognized by the partner. It is not adjusted for liabilities. |
|
|
Term
| PARTNERSHIP FORMATION AND TAX YEAR - Holding Periods |
|
Definition
The holding period (HP) of the partner’s interest includes the HP of contributed capital and Sec. 1231 assets.
1) If the interest was received in exchange for ordinary income property or services, the HP starts the day following the exchange.
2) The partnership’s HP in contributed property includes the partner’s HP even if the partner recognized gain |
|
|
Term
| PARTNERSHIP FORMATION AND TAX YEAR - Partner-Purchased Interest |
|
Definition
| The basis in a partnership interest purchased from a partner is its cost, which is the sum of the purchase price and the partner’s share of partnership liabilities. |
|
|
Term
| PARTNERSHIP FORMATION AND TAX YEAR - Partners’ Capital Accounts |
|
Definition
A capital account is maintained for each partner at the partnership level.
1) A partner’s initial capital account balance is the FMV of the assets (net of liabilities) (s)he contributed to the partnership.
2) It is separate from the partner’s AB in his/her partnership interest. |
|
|
Term
| PARTNERSHIP FORMATION AND TAX YEAR - Partnership Tax Year |
|
Definition
| The partnership’s tax year is determined with respect to the partners’ tax years. |
|
|
Term
| PARTNERSHIP FORMATION AND TAX YEAR - Partnership Elections |
|
Definition
Elections are generally made by the partnership.
Partnership-level election examples are accounting methods, tax year, inventory methods, start-up costs, installment sales, and depreciation methods. |
|
|
Term
| PARTNER’S TAXABLE INCOME - Overview |
|
Definition
| A partner’s taxable income may be affected by his/her interest in a partnership in several ways, e.g., as a result of his/her distributive share of partnership taxable income and separately stated items, from sale of his/her partnership interest, and from dealings with the partnership. Partnership taxable income is determined in the same way as for individuals, except that certain deductions are not allowed for a partnership, and other items are required to be separately stated. |
|
|
Term
| PARTNER’S TAXABLE INCOME - Separately Stated Items |
|
Definition
| Each partnership item of income, gain, deduction, loss, or credit that may vary the tax liability of any partner must be separately stated. |
|
|
Term
| PARTNER’S TAXABLE INCOME - Separately Stated Items |
|
Definition
Items that must be separately stated
include the following: Ordinary income (loss), Rental activities and related expenses, Guaranteed payments, Interest and dividend income, Royalties, Net short- and long-term capital gain or loss from the sale or exchange of capital assets, Sec. 1231 gain and loss, Other income (Portfolio income, Cancelation of debt, Recovery items, e.g., prior taxes, bad debts, etc., Investment income), Sec. 179 deductions, Other deductions (Charitable contributions, Investment expense, Depletion on oil and gas wells), Foreign income taxes paid or accrued, Tax-exempt income and related expenses,and Distributions |
|
|
Term
| PARTNER’S TAXABLE INCOME - Ordinary Income (Loss) |
|
Definition
| This includes all taxable items of income, gain, loss, or deduction that are not separately stated. |
|
|
Term
| PARTNER’S TAXABLE INCOME - Deductions |
|
Definition
| Certain deductions, e.g., charitable contributions, are disallowed in computing taxable income. |
|
|
Term
| PARTNER’S TAXABLE INCOME - Partner’s Distributive Share |
|
Definition
| Each partner is taxed on his/her share of partnership income whether or not it is distributed. |
|
|
Term
| PARTNER’S TAXABLE INCOME - Adjustments to Basis |
|
Definition
| The basis of a partner’s interest in a partnership is adjusted each year for subsequent contributions of capital, partnership taxable income (loss), separately stated items, variations in the partner’s share of partnership liabilities, and distributions from the partnership to the partner. |
|
|
Term
| PARTNER’S TAXABLE INCOME - Loss Limits |
|
Definition
a. A partnership ordinary loss is a negative balance of taxable income.
b. Basis limit. A partner is allowed to deduct the pro rata share of the partnership’s ordinary loss only to the extent of his/her basis in the partnership. |
|
|
Term
| PARTNER’S TAXABLE INCOME - Sale of a Partnership Interest |
|
Definition
| A sale or exchange of a partnership interest results in capital gain or loss, except that any gain realized attributable to unrealized receivables and inventory is ordinary income |
|
|
Term
| PARTNER’S TAXABLE INCOME - Gift of a Partnership Interest |
|
Definition
| Generally, no gain is recognized upon the gift. However, if partnership liabilities allocable to the gifted interest exceed the AB of the partnership interest, the donor must recognize gain. No loss is recognized on the gift |
|
|
Term
| PARTNER’S TAXABLE INCOME - Inheritance |
|
Definition
| The tax year of a partnership closes with respect to a partner whose entire interest in the partnership terminates, whether by death, liquidation, or otherwise. The successor has a FMV basis in the interest. |
|
|
Term
| PARTNER’S TAXABLE INCOME - Family Partnerships |
|
Definition
| A family partnership is one consisting of a taxpayer and his/her spouse, ancestors, lineal descendants, or trusts for the primary benefit of any of them. Siblings are not treated as members of the taxpayer’s family for these purposes. |
|
|
Term
| PARTNER’S TAXABLE INCOME - Reporting Requirements |
|
Definition
| A partnership, as a conduit, is not subject to federal income tax. But it must report information including partnership items of income, loss, deduction, and credit to the IRS. |
|
|
Term
| PARTNER’S TAXABLE INCOME - Partnership Tax Administration |
|
Definition
| The IRC provides for designation of a tax matters partner (TMP), e.g., the general partner holding the largest partnership interest. |
|
|
Term
PARTNERS DEALING WITH OWN PARTNERSHIP -
Overview |
|
Definition
| The Code recognizes that a partner can engage in property, services, and loan transactions with the partnership in a capacity other than as a partner, i.e., as an independent, outside third party. The tax result, in general, is as if the transaction took place between two unrelated persons after arm’s-length negotiations. |
|
|
Term
| PARTNERS DEALING WITH OWN PARTNERSHIP - Customary Partner Services |
|
Definition
| When a partner performs services for the partnership that are customarily performed by a partner, the partner’s return is generally his/her share of profits of the partnership business. |
|
|
Term
| PARTNERS DEALING WITH OWN PARTNERSHIP - Guaranteed Payments |
|
Definition
| A guaranteed payment (GP) is a payment to a partner for services rendered or capital used that is determined without regard to the income of the partnership. |
|
|
Term
| PARTNERS DEALING WITH OWN PARTNERSHIP - Nonpartner Capacity |
|
Definition
| Payments to a partner without regard to income of the partnership for property or for services not customarily performed by a partner are generally treated as if the transaction took place between two unrelated persons after arm’s-length negotiations. |
|
|
Term
| TREATMENT OF PARTNERSHIP LIABILITIES - Overview |
|
Definition
| A partner’s share of partnership liabilities affects the partner’s basis in his/her partnership interest and can result in increased gain being recognized by the partner. Any increase in a partner’s share of liabilities of the partnership increases the partner’s basis. The opposite is true for a decrease in partnership liabilities. |
|
|
Term
| TREATMENT OF PARTNERSHIP LIABILITIES - Recourse Liabilities |
|
Definition
a. A liability is a recourse liability if the creditor has a claim against the partnership or any partner for payment if the partnership defaults.
b. Partners generally share recourse liabilities based on their ratio for sharing losses. |
|
|
Term
| TREATMENT OF PARTNERSHIP LIABILITIES - Nonrecourse Liabilities |
|
Definition
| The creditor has no claim against the partnership or any partners. At most, the creditor has a claim against a particular secured item of partnership property. |
|
|
Term
| DISTRIBUTION OF PARTNERSHIP ASSETS - Overview |
|
Definition
A distribution is a transfer of value from the partnership to a partner in reference to his/her interest in the partnership.
1) A distribution may be in the form of money, liability relief, or other property.
2) A draw is a distribution. |
|
|
Term
| DISTRIBUTION OF PARTNERSHIP ASSETS - Current Distributions |
|
Definition
| A current (or operating) distribution reduces the partner’s basis in the partnership interest. Generally, no gain or loss is recognized by the partnership when it distributes property, including money. |
|
|
Term
| DISTRIBUTION OF PARTNERSHIP ASSETS - Disproportionate Distributions |
|
Definition
| Gain is recognized on a distribution of property that is disproportionate with respect to unrealized receivables (URs) or substantially appreciated inventory (SAI). The distribution will be recharacterized as if the URs or SAI were distributed. |
|
|
Term
| DISTRIBUTION OF PARTNERSHIP ASSETS - Liquidating Distributions |
|
Definition
| Distributions liquidating the entire interest of a partner may be due to partnership termination and/or the retirement or death of the partner. Sale to the partnership of a partner’s entire interest is treated as a liquidating distribution. |
|
|
Term
| TERMINATION OF PARTNERSHIP - Overview |
|
Definition
| A partnership terminates for federal tax purposes only when operations of the partnership cease or 50% or more of the total partnership interests are sold or exchanged within any 12-month period. |
|
|
Term
| TERMINATION OF PARTNERSHIP - Merger |
|
Definition
| The merging partnership’s tax year is used if the partners of the merged firms own more than 50% of the resulting partnership. Otherwise, a new tax year is started. |
|
|
Term
TERMINATION OF PARTNERSHIP -
Split |
|
Definition
| The old partnership’s tax year continues; however, if partners owned less than 50% of the original partnership, a new tax year should be started. |
|
|
Term
| ELECTING LARGE PARTNERSHIPS - Overview |
|
Definition
| Large partnerships meeting certain requirements may now elect to use simplified reporting requirements. An electing large partnership combines most items of partnership income, deduction, credit, and loss at the partnership level and passes through net amounts to the partners. |
|
|
Term
| ELECTING LARGE PARTNERSHIPS - Number of Partners |
|
Definition
| An electing large partnership is any partnership with 100 or more nonservice partners during the preceding tax year. Service partnerships and commodity trading partnerships may not make this election. |
|
|
Term
| ELECTING LARGE PARTNERSHIPS - Sale of Interests |
|
Definition
| An electing large partnership will not terminate if 50% or more of its interests are sold or exchanged in a 12-month period. |
|
|
Term
| ELECTING LARGE PARTNERSHIPS - Separately Stated Items |
|
Definition
Separately stated items include
1) Net income or loss from passive loss limitation activities
2) Net income or loss from other activities (e.g., portfolio income)
3) Net capital gain or loss for portfolio items and passive activity (netting of the gains and losses occurs at the partnership level)
4) Tax-exempt interest
5) Net AMT adjustments
6) General credits
7) Low-income housing credit
8) Rehabilitation credit
9) Foreign income taxes (deduction or credit) |
|
|
Term
| ELECTING LARGE PARTNERSHIPS - Capital Gains and Losses |
|
Definition
| For electing large partnerships, netting of capital gains and losses occurs at the partnership level. |
|
|
Term
| EXEMPT ORGANIZATIONS - Exempt Status |
|
Definition
Exempt status generally depends on the nature and purpose of an organization.
1) An organization is tax-exempt only if it is of a class specifically described by the IRC as one on which exemption is conferred.
2) It may be organized as a corporation, trust, foundation, fund, community chest, society, etc.
3) An organization operated for the primary purpose of carrying on a trade or business for profit is generally not tax-exempt. |
|
|
Term
| EXEMPT ORGANIZATIONS - Examples |
|
Definition
Examples of organization types that may be exempt are religious or apostolic organizations, political organizations, social clubs, athletic clubs, fraternal beneficiary associations, chambers of commerce, real estate boards, labor organizations, civic welfare associations, and certain domestic and foreign corporations. Organizations that foster national or international amateur sports competition may be
exempt if they do not provide athletic facilities or equipment. Fraternal beneficiary associations that operate under the lodge system and provide
payment of life, sick, accident, or other benefits to members and their dependents are an exempt class. Social clubs organized for pleasure, recreation, and other nonprofitable purposes, substantially all of the activities of which are for such purposes, are an exempt class. |
|
|
Term
| EXEMPT ORGANIZATIONS - Prohibited Transactions |
|
Definition
| Certain employee trusts lose exempt status if they engage in prohibited transactions, e.g., lending without adequate security or reasonable interest, or paying unreasonable compensation for personal services. |
|
|
Term
| EXEMPT ORGANIZATIONS - Requirements for Exemption |
|
Definition
| An organization, other than an employee’s qualified pension or profit-sharing trust, must apply in writing to its IRS district director for a ruling or a determination that it is tax-exempt. To establish its exemption, an organization must file a written application with the key director for the district in which the principal place of business or principal office of the organization is located. |
|
|
Term
| EXEMPT ORGANIZATIONS - Annual Information Return |
|
Definition
| Exempt organizations are generally required to file annual information returns on or before the 15th day of the 5th month following the close of the taxable year. Exempt status may be denied or revoked for failure to file. The organization reports all gross income, receipts, and disbursements. |
|
|
Term
| EXEMPT ORGANIZATIONS - Unrelated Business Income Tax |
|
Definition
Tax-exempt organizations are generally subject to tax on income from unrelated
business income (UBI). An unrelated business is a trade or business activity regularly carried on for the
production of income (even if a loss results) that is not substantially related to performance of the exempt purpose or function, i.e., that does not contribute more than insubstantial benefits to the exempt purposes. |
|
|
Term
| EXEMPT ORGANIZATIONS - Charitable Deduction |
|
Definition
| Solicitations for contributions or other payments by tax-exempt organizations must include a statement if payments to that organization are not deductible as charitable contributions for federal income tax purposes. |
|
|
