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Exam 15: Forming and Operating Partnerships

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Question 41

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What general accounting methods may be used by a partnership, and how and by whom are they selected?

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A partnership generally has the option o...

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Question 42

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Erica and Brett decide to form their new motorcycle business as an 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 an FMV of $45,000 and 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?

A) $37,500.
B) $40,000.
C) $42,500.
D) $45,000.

E) None of the above
F) All of the above

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Question 43

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What type of debt is not included in calculating a partner's at-risk amount?

Clint noticed that the Schedule K-1 he just received from ABC Partnership included a $20,000 ordinary business loss allocation.His tax basis in ABC at the beginning of ABC's most recent tax year was $10,000.Comparing the Schedule K-1 he recently received from ABC with the Schedule K-1 he received from ABC last year, Clint noted that his share of ABC partnership debt changed as follows: recourse debt increased from $0 to $2,000, qualified nonrecourse debt increased from $0 to $3,000, and nonrecourse debt increased from $0 to $3,000.Finally, the Schedule K-1 Clint recently received from ABC reflected a $1,000 cash contribution he made to ABC during the year. Clint is not a material participant in ABC Partnership, and he received $10,000 of passive income from another investment during the same year he received the loss allocation from ABC.How much of the $20,000 loss from ABC can Clint deduct currently, and how much of the loss is suspended because of the tax basis, at-risk, and passive activity loss limitations?

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

In what order are the loss limitations for partnerships applied?

Under proposed regulations issued by the Treasury Department, in which of the following situations should an LLC member be treated as a general partner for self-employment tax purposes?

Which of the following would not be classified as a separately stated item?

What form does a partnership use when filing an annual informational return?

Which person would generally be treated as a material participant in an activity?

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

Bob is a general partner in Fresh Foods Partnership and is trying to determine if the income reported on his K-1 should be classified as passive or active trade or business income.List three different criteria that, if met, would allow Bob to treat the income from Fresh Foods as active trade or business income.

What is the correct order for applying the following three items to adjust a partner's tax basis in his partnership interest: (1) Increase for share of ordinary business income, (2) Decrease for share of separately stated loss items, and (3) Decrease for distributions?

Tax elections are rarely made at the partnership level.

XYZ, LLC, has several individual and corporate members.Abe and Joe, individuals with 4/30 year-ends, each have a 23 percent profits and capital interest.RST, Inc., a corporation with a 6/30 year-end, owns a 4 percent profits and capital interest, while DEF, Inc., a corporation with an 8/30 year-end, owns a 4.9 percent profits and capital interest.Finally, 30 other calendar year-end individual partners (each with less than a 2 percent profits and capital interest) own the remaining 45 percent of the profits and capital interests in XYZ.What tax year-end should XYZ use, and which test or rule requires this year-end?

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

On March 15, 20X9, Troy, Peter, and Sarah formed Picture Perfect General Partnership.This partnership was created to sell a variety of cameras, picture frames, and other photography accessories.When it was formed, the partners received equal profits and capital interests, and the following items were contributed by each partner: -Troy-cash of $3,000, inventory with an FMV and tax basis of $5,000, and a building with an FMV of $22,000 and adjusted basis of $10,000.Additionally, the building was secured by a $10,000 nonrecourse mortgage. -Peter-cash of $5,000, accounts payable of $12,000 (recourse debt for which each partner becomes equally responsible), and land with an FMV of $27,000 and tax basis of $20,000. -Sarah-cash of $2,000, accounts receivable with an FMV and tax basis of $1,000, and equipment with an FMV of $40,000 and adjusted basis of $3,500.Sarah also contributed a $23,000 nonrecourse note payable secured by the equipment. What is each partner's outside basis, and how much gain (loss)must the partners recognize in 20X9, when Picture Perfect was formed?

Alfred, a one-third profits and capital partner in Pizzeria Partnership, needs help in adjusting his tax basis to reflect the information contained in his most recent Schedule K-1 from the partnership.Unfortunately, the Schedule K-1 he recently received was for Year 3 of the partnership, but Alfred only knows that his tax basis at the beginning of Year 2 of the partnership was $23,000.Thankfully, Alfred still has his Schedule K-1 from the partnership for Years 1 and 2. Using the following information from Alfred's Year 1, Year 2, and Year 3 Schedule K-1, calculate his tax basis the end of Year 2 and Year 3. $\begin{array}{c}\begin{array}{lll} \text {Year 1:}\\ \text {Ordinary business income}\\ \text {Cash distribution}\\ \text {Alfred's share of partnership debt}\\ \text {Guaranteed payment}\\ \text {Nondeductible expense}\\ \text {Tax-exempt income}\\ \text {Year 2:}\\ \text {Ordinary business loss}\\ \text {Cash contribution}\\ \text {Alfred's share of partnership debt}\\ \text {Guaranteed payment}\\ \text {Nondeductible expense}\\ \text {Tax-exempt income}\\ \text {Year 3:}\\ \text {Ordinary business loss}\\ \text {Alfred's share of partnership debt}\\ \text {Nondeductible expenses}\\ \text {Guaranteed payment}\\\end{array}\begin{array}{lr}\\\$ & 10,000 \\\$ & 7,000 \\\$ & 85,000 \\\$ & (4,500 \\\$ & (1,000) \\\$ & 1,200 \\\\\$ & (5,000) \\\$ & 10,000 \\\$ & 73,000 \\\$ & (7,500 \\\$ & (3,000) \\\$ & 1,500 \\& \\\$ & (13,000) \\\$ & 58,000 \\\$ & (3,000) \\\$ & (7,500 \end{array}\end{array}$

For partnership tax years ending after December 31, 2015, partnerships can request up to a six-month extension by filing IRS Form 7004 prior to the original due date of the partnership return.

Which requirement must be satisfied in order to specially allocate partnership income or losses to partners?