Question 1

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.

Accepted Answer

A general partner's share of ordinary business income is not considered investment income, it is considered self-employment income and must be included on their tax return as such. In addition to guaranteed payments, a general partner must also report their share of the partnership's profits or losses on their tax return.

Question 2

A partnership can elect to amortize organization and startup costs; however,syndication costs are not deductible.

Accepted Answer

Organization and startup costs can be amortized over a period of 180 months, while syndication costs are not deductible and cannot be amortized.

Question 3

Partnerships tax rules incorporate both the entity and aggregate approaches.

Accepted Answer

Partnership tax rules allow for both the entity approach and the aggregate approach, which means that the partnership can be treated as a separate entity for some tax purposes and as a collection of individual partners for others.

Question 4

The least aggregate deferral test uses the profit percentage of each partner to determine the minimum amount of tax deferral for the partner group as a whole in determining the permissible tax year-end of a partnership.

Accepted Answer

This statement is true. The least aggregate deferral test takes into account the profit percentage of each partner to determine the minimum amount of tax deferral for the partner group as a whole. This helps determine the most beneficial tax year-end for the partnership.

Question 5

An additional allocation of partnership debt or relief of partnership debt is considered to be a deemed cash contribution or cash distribution respectively.

Accepted Answer

This is true. An additional allocation of partnership debt is considered a deemed cash contribution, while relief of partnership debt is considered a deemed cash distribution.

Question 6

A partner's outside basis must first be decreased by any negative basis adjustments and then increased by any positive basis adjustments.

Accepted Answer

A partner's outside basis is first increased by any positive basis adjustments and then decreased by any negative basis adjustments. Positive adjustments include contributions and share of income, while negative adjustments include distributions and share of losses.

Question 7

Guaranteed payments are included in the calculation of a partnership's ordinary business income (loss)and are also treated as separately stated items.

Accepted Answer

Guaranteed payments made to a partner are included in the partnership's ordinary business income (loss) calculation but are also treated as separately stated items.

Question 8

Partnerships can use special allocations to shift built-in gains and built-in losses on contributed property from a partner who contributed the property to other partners.

Accepted Answer

The answer of Partnerships can use special allocations to shift...

Question 9

Income earned by flow-through entities is usually taxed only once at the entity level.

Accepted Answer

Income earned by flow-through entities (such as partnerships, S corporations, and sole proprietorships) is not taxed at the entity level, but rather flows through to the owners and is taxed on their individual tax returns. Therefore, it is not taxed only once at the entity level.

Question 10

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

Accepted Answer

Nonrecourse debt, which is debt that is secured solely by the partnership's assets, is generally allocated according to the profit-sharing ratios of the partnership. This means that partners who have a larger share of the profits will also bear a larger share of the risk associated with the nonrecourse debt.

Question 11

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.

Accepted Answer

The term "outside basis" actually refers to a partner's basis in her partnership interest, and the term "inside basis" refers to the partnership's basis in its assets.

Question 12

Actual or deemed cash distributions in excess of a partner's outside basis are generally taxable as capital gains.

Accepted Answer

This is true as per the rules of partnership taxation. If a partner receives cash distributions from the partnership that exceed their outside basis in the partnership, then the excess amount is considered a capital gain, which is taxable.

Question 13

Tax elections are rarely made at the partnership level.

Accepted Answer

Tax elections can be made at the partnership level, such as for electing to be taxed as a different type of partnership or for electing out of certain tax rules.

Question 14

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

Accepted Answer

Partners receiving profits interests for services typically recognize income only when there is a liquidation event or when they sell their interest, not at the time of receipt, and the character of the income (capital gains vs. ordinary income) depends on the nature of the underlying income of the partnership.

Question 15

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

Accepted Answer

A partnership with a C corporation partner may use either the cash or accrual method, depending on the partner's tax status and the partnership agreement.

Question 16

Partners adjust their outside basis by adding non-deductible expenses and subtracting any tax-exempt income to avoid being double taxed.

Accepted Answer

Partners adjust their outside basis by subtracting nondeductible expenses and adding any tax-exempt income to avoid being taxed on the same income twice.

Question 17

A purchased partnership interest has a holding period beginning on the date of purchase regardless of the type of property held by the partnership.

Accepted Answer

The holding period for a purchased partnership interest begins on the date of purchase, regardless of the type of property held by the partnership. This is because the investor is purchasing a share of the partnership, rather than the underlying assets held by the partnership.

Question 18

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.

Accepted Answer

This statement is true. Partnerships can request up to a six-month extension by filing IRS Form 7004 prior to the original due date of their partnership return.

Question 19

The character of each separately stated item is determined at the partner level.

Accepted Answer

The answer of The character of each separately stated item...

Question 20

Adjustments to a partner's outside basis are made annually to prevent double taxation on the sale of a partnership interest or at the time of a partnership distribution.

Accepted Answer

This statement is true. Adjustments to a partner's outside basis are made annually to avoid double taxation when a partnership interest is sold or when partnership distributions are made. This ensures that the partner is only taxed once on their share of partnership income and gains.

Quiz 14: Forming and Operating Partnerships