Taxation Essentials of LLCs and Partnerships

Chapter 1Overview: Basic Tax Structure of Partnerships and LLCs

Learning objectives

• Distinguish between the various types of partnerships and limited liability companies (LLCs).
• Identify the effects of investor contributions and distributions on their basis in a partnership or LLC interest.
• Determine how partnerships and LLCs opting to be treated as partnerships report their federal taxable income to the IRS and to investors.
• Identify considerations related to the application of the check-the-box rules when electing to treat an entity as a partnership, LLC, or corporation.
• Compute the tax consequences of converting from a corportion to an LLC (or partnership);
• Recognize when pass-through income from a partnership or LLC is subject to the self-employment tax.

What is a partnership for federal income tax purposes?

For tax purposes, a partnership exists when two or more taxpayers join together, without incorporating, to carry on business or investment activities for their mutual (or “joint”) benefit. Partnerships can be used to conduct active businesses or to carry on investment activities. Moreover, the partnership can be structured in such a way that some partners participate actively in partnership operations while others play the role of passive investors, content to share in the profits (or losses) derived from partnership operations while playing no active role in day-to-day management activities. The primary strength of the partnership as a vehicle for conducting business ...