Exam 20: Forming and Operating Partnerships

Explain why partners must increase their tax basis for their share of partnership taxable and nontaxable income or gain and reduce their basis by their share of partnership deductible and nondeductible expenses or losses?

A partner can apply any passive activity losses against any passive activity income for the year.

What is the rationale for the specific rules partnerships must follow in determining a partnership's taxable year-end?

If partnership debt is reduced and a partner is deemed to receive a cash distribution, what impact does the deemed distribution have on the partner if it is in excess of her tax basis?

Which of the following statements is true when property is contributed in exchange for a partnership interest?

Illuminating Light Partnership had the following revenues, expenses, gains, losses, and distributions: Sales \ 60,000 Long-Term Capital Gain \ 8,000 Qualified Dividends \ 5,000 Cost of Goods Sold \ 40,000 Employee Wages \ 15,000 Guaranteed Payment to Managing Partner \ 25,000 Municipal Bond Interest \ 5,000 Section 179 Expense \ 10,000 MACRS Depreciation \ 8,000 Section 1231 Gains \ 3,000 Fines and Penalties \ 1,500 Given these items, what is Illuminating Light's ordinary business income (loss) for the year?

Partners must generally treat the value of profits interests they receive in exchange for services as ordinary income.

Which of the following statements exemplifies the entity theory of partnership taxation?

Which of the following statements regarding partnerships losses suspended by the tax basis limitation is true?

Any losses that exceed the tax basis of a partner are suspended and carried forward for 20 years.

Nonrecourse debt is generally allocated according to the profit-sharing ratios of the partnership.

A general partner's share of ordinary business income is similar to investment income; thus, a general partner only includes their guaranteed payments as self-employment income.

Greg, a 40% partner in GSS Partnership, contributed land to the partnership in exchange for his partnership interest when the partnership was formed. At the time, his basis in the land was $30,000 and its FMV was $133,000. Three years after the partnership was formed, GSS Partnership decided to sell the land to an unrelated party for $150,000. When the land is sold, how much of the gain should be allocated to each partner of GSS Partnership if Sam and Steve are each 30% partners?

What is the difference between a partner's tax basis and at-risk amount?

On 12/31/X4, Zoom, LLC reported a $60,000 loss on its books. The items included in the loss computation were $30,000 in sales revenue, $15,000 in qualifying dividends, $22,000 in cost of goods sold, $50,000 charitable contribution, $20,000 in employee wages, and $13,000 of rent expense. How much ordinary business income (loss) will Zoom report on its X4 return?

Which of the following does not represent a tax election available to either partners or partnerships?

Erica and Brett decide to form their new motorcycle business as a LLC. Each will receive an equal profits (loss) interest by contributing cash, property, or both. In addition to the members' contributions, their LLC will obtain a $50,000 nonrecourse loan from First Bank at the time it is formed. Brett contributes cash of $5,000 and a building he bought as a storefront for the motorcycles. The building has a FMV of $45,000, an adjusted basis of $30,000, and is secured by a $35,000 nonrecourse mortgage that the LLC will assume. What is Brett's outside tax basis in his LLC interest?

The term "outside basis" refers to the partnership's basis in its assets; whereas, the term "inside basis" refers an individual partner's basis in her partnership interest.

What is the difference between the aggregate and entity theory of partnership taxation? Provide two examples of how partnership tax rules reflect the aggregate theory and two examples of how they reflect the entity theory.

A partnership with a C corporation partner must always use the accrual method as its accounting method.