Question 1

Micah's beginning capital account on his Schedule K-1 is $60,000. During the year, he is allocated $20,000 of partnership income, $8,000 of nondeductible expenses, and a $12,000 share of tax-exempt income. His Schedule K-
1s show allocations of nonrecourse debt of $20,000 (last year) and $30,000 (this year). Micah's ending capital account is $94,000.

Accepted Answer

Micah's beginning capital account is $60,000. Adding the allocated partnership income ($20,000), tax-exempt income ($12,000), and subtracting the nondeductible expenses ($8,000) results in an adjusted capital account of $84,000. The allocations of nonrecourse debt do not directly affect the capital account balance; thus, the ending capital account should be $84,000, not $94,000.

Question 2

William is a general partner in the WST partnership. During the current year, he receives a guaranteed payment of
$10,000 for services he provides to the partnership, and his distributive share of partnership income is $30,000. William is required to pay self-employment tax on the $10,000 guaranteed payment but not on his distributive share of partnership income.

Accepted Answer

Both the $10,000 guaranteed payment for services and his $30,000 distributive share of partnership income are subject to self-employment tax, as both are considered earnings from self-employment for a general partner.

Question 3

The total tax burden on entity income is greater for a partner in a partnership (up to 37% for an individual partner) than on a shareholder in a corporation (21% for an individual shareholder), so partnerships are used only in special situations.

Accepted Answer

Partnerships offer pass-through taxation, meaning income is taxed once at the individual partner's rate, not at both the entity and individual levels like C corporations. The choice between partnership and corporation depends on various factors, not just tax rates.

Question 4

The qualified business income deduction is calculated at the partner level. The partnership reports information the partner needs to calculate the deduction, such as W-2 wages and the unadjusted basis of the partnership's depreciable property.

Accepted Answer

The qualified business income deduction, also known as the Section 199A deduction, is indeed calculated at the partner or individual level, not at the entity level. Partnerships pass through information necessary for partners to calculate their deduction, including W-2 wages paid by the partnership and the partnership's unadjusted basis immediately after acquisition of qualified property.

Question 5

Maria owns a 60% interest in the KLM Partnership. Four years ago, her father gave her a parcel of land. The gift basis of the land to Maria is $60,000. In the current year, Maria had still not figured out how to use the land for her own personal or business use; consequently, she sold it to the partnership for $50,000. The partnership immediately started using the land as a parking lot for its employees. Maria may recognize her $10,000 loss on the sale.

Accepted Answer

The loss on the sale of property between a partnership and a partner who directly or indirectly owns more than 50% of the interest in the partnership capital or profits is not recognized for tax purposes.

Question 6

A cash distribution from a partnership to a partner generally is taxable to the partner.

Accepted Answer

A cash distribution from a partnership to a partner is generally not taxable to the partner as long as the distribution does not exceed the partner's basis in the partnership. The distribution is considered a return of capital.

Question 7

The sum of the partners' ending basis amounts equals the partners' ending capital account balances. These amounts are shown on the partnership's Schedule K.

Accepted Answer

The partners' ending basis amounts and the partners' ending capital account balances do not necessarily equal each other. The ending capital account balances are shown on the partnership's Schedule K-1, not Schedule K, and represent the partners' equity in the partnership. The partners' basis, however, includes their capital account balance along with adjustments for additional contributions, share of partnership debt, and distributions, which may not be reflected in the capital account balances.

Question 8

One of the disadvantages of the partnership form is that the partner's share of the partnership's taxable income is taxed to the partner even if it is not distributed.

Accepted Answer

In a partnership, each partner's share of profits is taxed as personal income, regardless of whether these profits are distributed or retained within the business.

Question 9

Debt of a limited liability company is allocated among its members using the nonrecourse debt allocation rules unless an LLC member has personally guaranteed the debt.

Accepted Answer

Nonrecourse debt is typically allocated among members based on their share of profits unless a member personally guarantees the debt, in which case it may be treated as recourse debt for that member.

Question 10

Steve's basis in his SAW Partnership interest is $200,000 including all adjustments at the beginning of the tax year, .
His allocable share of partnership items is: ($120,000) of ordinary loss, $6,000 tax-exempt interest income, and a
$14,000 long-term capital gain. In addition, during the year, the LLC distributed $20,000 of cash to Steve. Also during the year, Steve's share of partnership debt increased by $10,000. Steve's ending basis in his LLC interest is $80,000.

Accepted Answer

Steve's beginning basis in his SAW Partnership interest is $200,000. His share of the partnership's ordinary loss would reduce his basis, but only to the extent of his basis before considering any distributions. The tax-exempt interest income of $6,000 and the long-term capital gain of $14,000 would increase his basis. The cash distribution of $20,000 and the increase in his share of partnership debt by $10,000 would also affect his basis. Specifically, his basis would be adjusted as follows: Starting basis of $200,000 - $120,000 (ordinary loss, limited to his basis before the distribution and debt increase) + $6,000 (tax-exempt interest) + $14,000 (capital gain) - $20,000 (cash distribution) + $10,000 (increase in debt) = $90,000. Therefore, Steve's ending basis in his LLC interest would be $90,000, not $80,000.

Question 11

Anna and Brad are equal partners in the AB LLC. If AB distributes $10,000 of cash to Anna and a capital asset valued at $10,000 to Brad, and if both Anna and Brad continue to be members of the LLC, the distribution is classified as a proportionate current distribution.

Accepted Answer

The distribution is considered proportionate because both partners received an equal value from the LLC, maintaining their equal partnership status, even though the forms of distribution (cash to Anna and a capital asset to Brad) were different.

Question 12

In a current (nonliquidating) distribution, loss never is recognized.

Accepted Answer

In a current (nonliquidating) distribution, a partnership does not recognize loss on the distribution of property to a partner. Loss recognition is generally reserved for liquidating distributions.

Question 13

Emma's basis in her BBDE LLC interest is $60,000 at the beginning of the tax year. Her allocable share of LLC items are as follows: $20,000 of ordinary income, $2,000 tax-exempt interest income, and a $6,000 long-term capital gain. In addition, the LLC distributed $12,000 of cash to Emma during the year. Assuming that the LLC had no liabilities at the beginning or the end of the year, Emma's ending basis in her LLC interest is $76,000.

Accepted Answer

Emma's basis in her LLC interest is increased by her allocable share of LLC items and decreased by the amount of cash distributions she receives. Her allocable share of LLC items is $20,000 of ordinary income, $2,000 tax-exempt interest income, and a $6,000 long-term capital gain. She received $12,000 of cash distributions from the LLC. Therefore, her ending basis in her LLC interest is $60,000 + $20,000 + $2,000 + $6,000 - $12,000 = $76,000.

Question 14

Ashley purchased her partnership interest from Lindsey on the first day of the current year for $40,000 cash. Ashley received a $10,000 cash distribution from the partnership during the year, and her share of partnership income is
$15,000. Her share of partnership liabilities on the last day of the partnership year is $20,000. Ashley's outside basis for her partnership interest at the end of the year is $45,000.

Accepted Answer

The answer of Ashley purchased her partnership interest from Lindsey...

Question 15

Gina is a single taxpayer and an active partner in the GMA LLC. Gina's Schedule K-1 reflects a $20,000 ordinary income share, $2,000 of interest income, and a $10,000 guaranteed payment for services. Gina's self-employment income from other sources and modified adjusted gross income is about $300,000. With respect to the income from the LLC, Gina is subject to the 0.9% additional Medicare tax on $30,000 and the 3.8% net investment income tax of
$2,000.

Accepted Answer

Gina's self-employment income from other sources and modified adjusted gross income is about $300,000. This amount is above the threshold for the 0.9% additional Medicare tax and the 3.8% net investment income tax.

Question 16

Julie and Kate form an equal partnership during the current year. Julie contributes cash of $200,000, and Kate contributes property (adjusted basis of $90,000, fair market value of $260,000) subject to a nonrecourse liability of
$60,000. As a result of these transactions, Kate has a basis in her partnership interest of $120,000.

Accepted Answer

Kate's basis in her partnership interest would be calculated as her adjusted basis in the contributed property ($90,000) plus her share of the liability ($30,000, assuming the liability is shared equally), totaling $120,000. However, to find her correct basis, you must subtract the liability she is relieved of ($60,000), resulting in a basis of $60,000, not $120,000.

Question 17

Harry's basis in his partnership interest was $10,000 at the beginning of the tax year. For the year, his share of the partnership's loss was $8,000, and he also received a distribution of $4,000. Harry can deduct an $8,000 loss, and he recognizes a gain of $2,000 on the distribution of cash in excess of his remaining basis.

Accepted Answer

Harry can only deduct a loss up to his basis in the partnership. After the $8,000 loss, his basis would be reduced to $2,000. The $4,000 distribution exceeds his remaining basis by $2,000, which would be recognized as a gain, but he cannot deduct the full $8,000 loss.

Question 18

Belinda owns a 30% profit and loss interest in the BOW LLC, and her basis in the interest is $30,000 excluding her share of the LLC's liabilities. Belinda guarantees a $40,000 LLC debt. Remaining liabilities (not guaranteed by any of the LLC members) are $100,000. Belinda's basis in the LLC is $100,000.

Accepted Answer

Belinda's basis in the LLC is increased by her share of the LLC's liabilities, which is $30,000 (30% of $100,000). Her basis is also increased by the amount of the LLC debt she guarantees, which is $40,000. Therefore, her total basis in the LLC is $100,000 ($30,000 + $40,000 + $30,000).

Question 19

If a partnership allocates losses to the partners, the partners first applies the passive loss limitations, then the basis limitation, and finally the at-risk limitations. If all three hurdles are met, a partner may deduct the loss.

Accepted Answer

The correct order is first the basis limitation, then the at-risk limitations, and finally the passive loss limitations. If all three hurdles are met, a partner may deduct the loss.

Question 20

For Federal income tax purposes, a distribution from a partnership to a partner is treated the same as a distribution from a C corporation to its shareholders.

Accepted Answer

For Federal income tax purposes, a distribution from a partnership to a partner is generally not treated the same as a distribution from a C corporation to its shareholders. Partnerships are pass-through entities, meaning the income, deductions, gains, losses, and credits flow through to the partners and are taxed at their individual rates, whereas C corporations are taxed at the corporate level and distributions (dividends) to shareholders are taxed again at the individual level.

Quiz 21: Partnerships