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Leture Fundamentals of Taxation 2014 - Chapter 14: Partnership taxation

When you have completed this chapter, you should understand the following learning objectives: Explain the rules dealing with the formation of a partnership, be able to report partnership ordinary income or loss, determine separately stated items,. | Chapter 14 Partnership Taxation “People who complain about taxes can be divided into two classes: men and women.” -- Anonymous 1 14-2 LO #1- Partnership Formation Typically, a partner recognizes no gain or loss on the formation of a partnership Outside basis – the basis of the partnership interest in the hands of the partner Inside basis – the partner’s share of the basis of the individual assets in the partnership Inside basis usually equals outside basis 2 Typically, a partner does not recognize a gain or loss on the formation of a partnership and the basis of the assets contributed carries over to the basis in the partnership interest. 14-3 LO #1- Partnership Formation Basis-in, Basis-out – The beginning basis to the partnership is usually the basis of the contributed assets. Steps into the shoes – the basis of assets in the hands of the partnership is the same as the basis in the hands of the contributing partner. 3 The term “basis-in, basis-out” refers to the notion that the basis in the partnership interest is the same as the basis of the assets contributed. In other words, the partner now has an indirect ownership of the partnership assets via his or hers partnership interest. 14-4 LO #1- Partnership Formation Holding periods – general rule is that the holding period of the partnership interest includes the partner’s holding period when Section 1231 or capital assets are contributed Contribution of ordinary assets – the holding period begins on the date of the contribution. 4 The holding period (long-term or short-term) of the partnership interest usually is determined by the holding period of the assets contributed. This is not the case if inventory or accounts receivable are contributed to a partnership. In this case, the holding period of the partnership interest begins on the date of the contribution. 14-5 LO #1- Partnership Formation Contribution of services – a partner providing services in exchange for a partnership interest recognizes ordinary income | Chapter 14 Partnership Taxation “People who complain about taxes can be divided into two classes: men and women.” -- Anonymous 1 14-2 LO #1- Partnership Formation Typically, a partner recognizes no gain or loss on the formation of a partnership Outside basis – the basis of the partnership interest in the hands of the partner Inside basis – the partner’s share of the basis of the individual assets in the partnership Inside basis usually equals outside basis 2 Typically, a partner does not recognize a gain or loss on the formation of a partnership and the basis of the assets contributed carries over to the basis in the partnership interest. 14-3 LO #1- Partnership Formation Basis-in, Basis-out – The beginning basis to the partnership is usually the basis of the contributed assets. Steps into the shoes – the basis of assets in the hands of the partnership is the same as the basis in the hands of the contributing partner. 3 The term “basis-in, basis-out” refers to the notion that the .