Question 1

Partnership tax rules incorporate both the entity and aggregate approaches.

Accepted Answer

Partnership tax rules allow for both the entity approach, which treats the partnership as a separate entity that is subject to its own taxes, and the aggregate approach, which treats each partner as owning a separate share of the partnership's assets and income.

Question 2

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

According to the IRS, a purchased partnership interest has a holding period beginning on the date of purchase regardless of the type of property held by the partnership.

Question 3

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.

Question 4

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

Accepted Answer

Partnership can elect to amortize organization and start-up costs over a period of 180 months, but syndication costs are not deductible.

Question 5

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

Accepted Answer

Partnerships have the flexibility to use either the cash or accrual method of accounting. It is not mandated based on the type of partner involved.

Question 6

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 7

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 8

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 is one of the tests used to determine the permissible tax year-end of a partnership, and it considers the profit percentage of each partner in order to determine the minimum amount of tax deferral for the partner group as a whole.

Question 9

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 10

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. Any increase in partnership debt is considered a deemed cash contribution, while any decrease in partnership debt is considered a deemed cash distribution.

Question 11

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

Accepted Answer

Nonrecourse debt, which is debt that does not hold the partners personally liable, is typically allocated based on the profit-sharing ratios of the partnership. This means that partners with a higher percentage of profits will also bear a higher percentage of the nonrecourse debt.

Question 12

The term "outside basis" refers to the partnership's basis in its assets, whereas the term "inside basis" refers to an individual partner's basis in her partnership interest.

Accepted Answer

The term "inside basis" refers to the partnership's basis in its assets, whereas "outside basis" refers to an individual partner's basis in her partnership interest.

Question 13

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 but is instead subject to self-employment tax. Therefore, both the share of ordinary business income and guaranteed payments are considered self-employment income for tax purposes.

Question 14

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

Accepted Answer

This is correct according to the U.S. tax code. When a partner receives distributions from a partnership that exceed their outside basis, those excess distributions are treated as capital gains for tax purposes.

Question 15

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, LLCs, and S corporations, is not taxed at the entity level. Instead, it flows through to the owners' individual tax returns and is taxed at their individual tax rates. Therefore, it is not taxed only once at the entity level.

Question 16

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

Adjustments to a partner's outside basis are made annually to avoid double taxation on the sale of a partnership interest or a partnership distribution. This is achieved by adjusting the partner's basis for various transactions that occur during the year, such as contributions, distributions, and allocations of income, gain, loss, and deduction.

Question 17

Partners adjust their outside basis by adding nondeductible 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 18

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 19

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 are payments made by a partnership to a partner for services or the use of capital, and are deductible by the partnership as an ordinary business expense. These payments are included in the calculation of the partnership's ordinary business income (loss) and are also treated as separately stated items on the partner's Schedule K-1.

Question 20

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.

Quiz 9: Forming and Operating Partnerships