| Term | Definition |
|---|
| Partnerships | Are not taxable entities, they are reporting entities. Partnerships function as a conduit for income tax purposes. |
| Income taxation | Ordinary income and losses along with special gains and loss items channel through the partnership to the individual partners who report them on their personal tax returns; must report each partner's distributive share of the ordinary gain or loss as well as any special treated items, and self-employment taxes apply to all ordinary income passing to the owners. |
| when partnerships are formed | Arises when two or more persons join together to conduct a business activity, cannot be organizations that qualify as trusts, estates,or corporations |
| Entities that qualify as partnerships | Syndicates, pool, groups, and joint ventures, entities can choose to elect to be treated as partnerships |
| Partnership return | Form 1065 is strictly an informational return because partnerships do not pay taxes, due 15th day of fourth month after close of tax year, required even if there is no gross income |
| Reporting income | Any item of gross income which receives special consideration must be excluded from ordinary gain or loss and shown as a separate item on Schedule K of Form 1065 |
| Reporting business deductions | deductions are basically the same as an individuals deductions, this includes guaranteed payments to the partners for salaries and interest |
| Nonbusiness deductions | Partnerships do not include any nonbusiness deductions in the computation of ordinary gain or loss, such as the standard deduction and personal exemptions |
| Items that receive special treatments | 1st year Section 179 expensing deduction of business assets, dividends, interest, and royalties, net short and long term capital gains and losses, gain or loss from casualty and theft, gain or loss for sale or exchange of section 1231 assets, contributions, foreign taxes, income or loss from real estate rentals, income or loss from other rentals, expenses related to portfolio income, tax-exempt interest, recoveries, AMT preference items, nonbusiness and personal items |
| Property item | Gains. losses , depreciation, and depletion on property contributed by a partner to a partnership must be allocated in a way that takes into account the differences between the partnership's basis for the contributed property and the FMV at time of contribution |
| Reporting year | Each partner must include on the personal tax return a share of those items form the partnership tax year that ends with or within the tax year |
| Special Items | On the death, retirement, or withdrawal of a parter, the sale of a partnership interest, or addition of a new partner will not terminate the partnership tax year, however they will close the tax year for that partner, the partnership year will terminate with the sale or exchange of 50% or more and the terminated partnership liquidates the assets and liabilities and a new partnership is formed, gift or inheritance of 50% will not end the partnership year |
| Establishing the tax year | the tax year must be determined by the partners tax years, must follow a majority of partners or the principal partner (5% or more), default is a calendar year |
| Establishing a basis, increases | Computed without regard to the capital account balance, basis is increased by the investment of property or cash, the increase for property is limited to the basis in that property, basis of a partner's interest is also increased by taxable income, tax-exempt income, excess depletion deductions |
| decreases to a basis | By a partner's withdrawals of money and by the adjusted basis of all other property distributed to the partner, also decreased by losses (including capital losses), nondeductible partnership expenditures, may not be decreased below zero |
| Property basis | the basis of contributed property is the same as in the hands of the partner who contributed it, except with nonbusiness (personal) assets which are valued at the lesser of the adjusted basis or fair market value |
| Distributed property | No gain or loss is recognized by the partner or partnership when a partner increases an investment through contribution of property, except when a partner receives a capital interest in the partnership in exchange for services rendered and the FMV is considered as compensation |
| Liabilities | Increases in liabilities are treated as though the partner contributed money for a share of those liabilities, the ratio for sharing losses is used to calculate a partner's share or liabilities, accepting personal liabilities is treated as a distribution of money to the partner |
| Losses | Partnership losses reduce the basis of the partner's investment in the partnership, may only be deducted up to the partner's basis and may be available in future years to offset increases to basis |
| Withdrawals | Withdrawals of money or property from the partnership decreases the basis of the partner's investment by the partnership's adjusted basis in that property, basis stays the same for the partner unless it exceeds the basis of the partner in the partnership, and in that case it is equal to the basis in the partnership and the basis is reduced to zero |
| Special adjustments | The partnership may elect to adjust he basis of property for the benefit of a new partner or in a complete or partial liquidation of a partner's interest |
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