Question 1

Items that are not required to be shown on the partners' Schedules K-1 include AMT adjustments and preferences and taxes paid to foreign countries,as these calculations are made by the partnership.

Accepted Answer

AMT adjustments, preferences, and taxes paid to foreign countries are required to be reported on the partners' Schedules K-1, as they affect the individual partner's tax liability and calculations.

Question 2

Which of the following is a correct definition of a concept related to partnership taxation?

Accepted Answer

The answer of Which of the following is a correct...

Question 3

Ashley purchased her partnership interest from Lindsey on the first day of the current year for $40,000 cash.She 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 4

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,regardless of whether or not distributed.

Accepted Answer

This is known as the "pass-through" taxation characteristic of partnerships. The partnership itself does not pay taxes on the income earned, but instead passes on the tax liability to the individual partners.

Question 5

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's basis in his partnership interest is reduced by his share of the partnership's loss, making it $2,000 ($10,000 - $8,000). Since his distribution of $4,000 exceeds his remaining basis of $2,000, he must reduce his basis to $0 and recognize the excess distribution of $2,000 as a gain. Therefore, Harry cannot deduct the entire $8,000 loss.

Question 6

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 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 ending basis in her LLC interest is calculated as follows:

Starting basis = $60,000
Allocable share of ordinary income = $20,000
Allocable share of tax-exempt interest income = $2,000
Allocable share of long-term capital gain = $6,000
Cash distributed = $12,000

Total basis increase = $40,000 (sum of the above items)
Ending basis = Starting basis + Total basis increase = $60,000 + $40,000 = $76,000. Therefore, the statement is true.

Question 7

On January 1 of the current year,Anna and Jason form an equal partnership.Anna contributes $50,000 cash and a parcel of land (adjusted basis of $100,000; fair market value of $150,000)in exchange for her interest in the partnership.Jason contributes property (adjusted basis of $180,000; fair market value of $200,000)in exchange for his partnership interest.Which of the following statements is true concerning the income tax results of this partnership formation?

Accepted Answer

- Jason does not recognize any gain or loss on his property transfer because he exchanged it for a partnership interest (non-taxable under section 721).
- Jason's tax basis for his partnership interest is $180,000 (the adjusted basis of his property transferred).
- Anna's tax basis for her partnership interest is $150,000 (the fair market value of the land she contributed). The adjusted basis of the land is irrelevant for determining her tax basis in the partnership interest.
- The partnership has a $100,000 adjusted basis in the land contributed by Anna ($50,000 from her cash contribution and $50,000 from the adjusted basis of the land).

Question 8

Partners' capital accounts should be determined using the same method on Form 1065 Schedule L,Form 1065 Schedule M-2,and the Schedules K-1 prepared for the partners.

Accepted Answer

The answer of Partners' capital accounts should be determined using...

Question 9

Which one of the following statements regarding partnership taxation is incorrect?

Accepted Answer

A partnership is not a taxable entity for Federal income tax purposes. Instead, the partnership files an information return (Form 1065) to report its income, deductions, gains, losses, etc., and then passes through its income, gains, losses, deductions, credits, etc. to its partners on a Schedule K-1. Each partner then reports their share of the partnership income or loss on their individual income tax return.

Question 10

Nicholas,a 1/3 partner with a basis in the interest of $80,000 at the beginning of the year,received a guaranteed payment in the current year of $50,000.Partnership income before consideration of the guaranteed payment was $20,000.Nicholas reports a $10,000 ordinary loss from partnership operations,and the $50,000 guaranteed payment as ordinary income.

Accepted Answer

Nicholas is considered a partner in the partnership and is therefore subject to the partnership's profits and losses. His basis in the partnership interest is $80,000, which means he has invested $80,000 in the partnership. The partnership's income before the guaranteed payment was $20,000, which means that the total income was divided among the partners. Since Nicholas is a 1/3 partner, his share of the income would be $6,666.67. However, since he received a guaranteed payment of $50,000, his total income from the partnership would be $50,000 + $6,666.67 = $56,666.67.

Since his share of the partnership income was less than the guaranteed payment, he would report a $10,000 ordinary loss from partnership operations, and the $50,000 guaranteed payment as ordinary income on his tax return.

Question 11

Which of the following entity owners cannot participate in management of the entity?

Accepted Answer

A limited partner in a limited liability limited partnership cannot participate in management of the entity.

Question 12

The amount of a partnership's income and loss from operating activities is combined with separately stated income and expenses to determine the partnership's equivalent of "taxable income." This amount is reconciled to book income on the partnership's Schedule M-1 or Schedule M-3.

Accepted Answer

This statement is true. The partnership's taxable income is determined by combining income and loss from operating activities with separately stated income and expenses, and then reconciling it to book income on Schedule M-1 or Schedule M-3.

Question 13

The JPM Partnership is a US-based manufacturing company.JPM calculates the domestic production activities deduction (§ 199)and deducts that amount on its Form 1065.

Accepted Answer

The answer of The JPM Partnership is a US-based manufacturing...

Question 14

The sum of the partners' ending basis amounts on all Schedules K-1 equals the partners' ending capital account balance shown on the partnership's Schedule L.

Accepted Answer

The answer of The sum of the partners' ending basis...

Question 15

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 16

Blaine contributes property valued at $50,000 (basis of $40,000)in exchange for a 25% interest in the BIKE Partnership.If the property is later sold for $70,000,gain of $15,000 will be allocated to Blaine.

Accepted Answer

Since Blaine contributed property with a basis of $40,000 but a fair market value of $50,000, this means that Blaine recognized a gain of $10,000 upon contribution. Therefore, when the property is later sold for $70,000, $15,000 of the gain will be allocated to Blaine, which is 25% of the $60,000 gain on the sale.

Question 17

Tim,Al,and Pat contributed assets to form the equal TAP Partnership.Tim contributed cash of $40,000 and land with a basis of $80,000 (fair market value of $60,000).Al contributed cash of $60,000 and land with a basis of $50,000 (fair market value of $40,000).Pat contributed cash of $60,000 and a fully depreciated property ($0 basis)valued at $40,000.Which of the following tax treatments is not correct?

Accepted Answer

According to the information given, Al contributed land with a basis of $50,000 and a fair market value of $40,000. This means that Al will realize a loss of $10,000. However, Al cannot recognize this loss because it is a contribution to a partnership and not a sale or exchange of property. Therefore, statement B is incorrect.

Question 18

A partnership will take a carryover basis in an asset it acquires when:

Accepted Answer

According to § 721(a), a partnership will take a carryover basis in an asset it acquires from a partner as a contribution to partnership capital. The other options (A, B, and C) do not involve a contribution of an asset to the partnership's capital and would not result in a carryover basis.

Question 19

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

Accepted Answer

The answer of If a partnership allocates losses to the...

Question 20

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 the land 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

Maria cannot recognize her loss on the sale to the partnership because the partnership is considered a related party and the transaction is therefore subject to special rules under tax law. The loss is deferred until the partnership disposes of the land to an unrelated party.

Quiz 11: Partnerships and Limited Liability Entities