Question 1

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

Accepted Answer

Income is taxed only once at the owner level.

Question 2

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 is true. 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. These adjustments are made to ensure that the partner's basis in their share of the partnership's assets reflects its current value, and that any gain or loss on the sale or distribution of the partnership interest is correctly calculated.

Question 3

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

Accepted Answer

Non-deductible expenses decrease basis and tax-exempt income increases basis.

Question 4

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 statement is true. When there is an additional allocation of partnership debt, it is treated as if the partner has made a cash contribution to the partnership. Likewise, when there is a relief of partnership debt, it is treated as if the partner has received a cash distribution from the partnership.

Question 5

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

General partners report guaranteed payments and their share of ordinary business income as self-employment income because they are actively involved in managing the partnership.

Question 6

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

Accepted Answer

Partners must treat the value of capital interests they receive in exchange for services as ordinary income. Because there is no immediate liquidation value associated with a profits interest, the partner providing the services will not recognize income.

Question 7

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

Accepted Answer

Nonrecourse debt is the debt for which the lender only has recourse to the specific asset or property financed by the debt and not to the borrower's other assets or income. In a partnership, allocation of nonrecourse debt is generally based on the profit-sharing ratios of the partnership.

Question 8

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

Accepted Answer

An exception applies to partnerships with annual gross receipts for the three prior tax years of 25 million or less.

Question 9

Partnerships tax rules incorporate both the entity and aggregate approaches.

Accepted Answer

Partnership tax rules are unique in that they incorporate both the entity and aggregate approaches. Partnerships are considered pass-through entities, meaning that the partnership itself does not pay taxes on its income, but rather the individual partners are responsible for reporting their share of the partnership's income on their personal tax returns. At the same time, partnerships are treated as separate entities for some tax purposes, such as filing a partnership tax return and being subject to certain tax rules and regulations.

Question 10

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 11

Tax elections are rarely made at the partnership level.

Accepted Answer

In formulating partnership tax law, Congress adopted an entity and aggregate approach. Most tax elections for a partnership are made at the partnership level. The requirement that partnerships make most tax elections represents the entity concept.

Question 12

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

The statement is true. The least aggregate deferral test takes into account the profit percentage of each partner when calculating the minimum amount of tax deferral for the entire partner group.

Question 13

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

Accepted Answer

Syndication costs are not deductible, while organization and startup costs can be amortized over time by partnerships.

Question 14

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 to partners for services rendered to the partnership and are treated as ordinary income (or loss) for the partnership. These payments are also separately stated on the partner's Schedule K-1.

Question 15

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

Accepted Answer

According to the tax code, if a partner receives actual or deemed cash distributions that exceed their outside basis, they are generally taxable as capital gains. This is because the excess distribution is viewed as a gain on the partner's investment in the partnership.

Question 16

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 must first be increased by any positive basis adjustments and then decreased by any negative basis adjustments.

Question 17

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 18

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.

Question 19

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

Accepted Answer

The partnership reports the amount and character of items of income and loss flowing through the partnership.

Question 20

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

Built-in gains and losses on contributed property can only be allocated to the partner contributing the property.

Quiz 9: Forming and Operating Partnerships