Wiley CPAexcel Exam Review 2014 Focus Notes: Regulation

Module 37: Partnership Taxation

PARTNERSHIP TAXATION

Formation of Partnerships

Contribution of Assets

When a partner contributes cash or property for a partnership interest, the transfer is generally nontaxable

• Partner's basis in partnership = basis for assets contributed
• Partnership's basis for assets = partner's basis (transferred basis)

Contribution of Services

When a partner contributes services for an interest in partnership capital, the FMV of the partnership interest received is taxable as compensation

• Partner's recognized income and basis for partnership interest = FMV
• Partnership recognizes expense or asset = FMV

Changes in Liabilities

Changes in liabilities are treated as a change in the flow of money and either increase or decrease a partner's basis

• Increased by an increase in partnership liabilities, or an increase in individual liabilities (treat as a contribution of money and increase basis)
• Decreased by a decrease in partnership liabilities, or a decrease in individual liabilities (treat as a distribution of money and decrease basis)

Partnership's Tax Year

Adoption or change of partnership tax year restricted by tax years used by its partners

1. 1)   Adopt same tax year as used by partners owning > 50% of partnership interests
2. 2)   If partners owning > 50% of interests do not have same year, adopt tax year used by partners owning ≥ 5% interest if all have same tax year
3. 3)   If all partners with ≥ 5% interest do not have same tax year, use year that results in ...