Tax II - Exam 3

What is the definition of a partnership?

two or more people working together to earn a profit; it is the default organization and does not have to be specifically identified

What do partners have in a general partnership?

they are jointly and severally liable

What is a limited liability company (LLC)?

combines the corporate benefit of limited liability with benefits of partnership taxation

What is a limited partnership?

limited partners are only liable up to equity in investment but general partners are fully liable

What form does the partnership file?

form 1065 but it is not actually paying taxes

When is the form 1065 due?

March 15th

What is the initial outside basis (partner-level)?

basis the partner has in their partnership interest

What is the inside basis (partnership-level)?

basis the partnership has in each individual asset

What section governs partnership formation?

721

What is capital interest?

right of partners to receive a share in the partnership assets if the partnership were to liquidate the

What are profits interest?

right or obligation to receive a share of future profits or future losses

What must partners do with partnerships debts?

when calculating their tax basis they must include their share of debt

What is recourse debt?

the partnership or at least one partner is personally liable and allocated to partners based on economic risk of loss

What is nonrecourse debt?

no partner is personally liable

What kinds of debt increase basis for general partners?

recourse and nonrecourse

What types of debt increase basis for limited partners?

nonrecourse unless personally guaranteeded

What later effects a partner’s basis?

partnership activity

How do partners contributing services see capital interests?

they recognize ordinary income

What are guaranteed payments?

fixed amounts paid to partners regardless of profit or loss earned by partnerships who treat them as ordinary income

From what are guaranteed payments deducted from?

they are not included in the partnership’s income

What are ordinary losses deductible against?

any type of taxable income

What 4 hurdles must losses pass in order for them to be deductible on a tax return?

1. tax-basis

2. at-risk amount

3. passive activity loss limitation

4. excess business loss limitation

What is the passive loss rules?

doesn’t allow the deduction of passive losses against active or portfolio income

What is at-risk?

the amount of a taxpayer’ economic investment in an activity (cash + adjusted basis + recourse debt)

What kind of debt is not included in at-risk?

nonrecourse debt