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Exam 20: Forming and Operating Partnerships

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Question 41

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Any losses that exceed the tax basis of a partner are suspended and carried forward for 20 years.

A) True
B) False

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Question 42

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On January 1, X9, Gerald received his 50% profits and capital interest in High Air, LLC in exchange for $2,000 in cash and real property with a $3,000 tax basis secured by a $2,000 nonrecourse mortgage. High Air reported a $15,000 loss for its X9 calendar year. How much loss can Gerald deduct, and how much loss must he suspend if he only applies the tax basis loss limitation?

A) $0, $4,000
B) $0, $7,500
C) $0, $15,000
D) $4,000, $0
E) None of these

F) A) and E)
G) B) and D)

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Question 43

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

On 12/31/X4, Zoom, LLC reported a $60,000 loss on its books. The items included in the loss computation were $30,000 in sales revenue, $15,000 in qualifying dividends, $22,000 in cost of goods sold, $50,000 charitable contribution, $20,000 in employee wages, and $13,000 of rent expense. How much ordinary business income (loss) will Zoom report on its X4 return?

Partnerships must maintain their capital accounts according to which of the following rules?

Which of the following statements regarding a partner's basis adjustments is true?

Jordan, Inc., Bird, Inc., Ewing, Inc., and Barkley, Inc. formed Nothing-But-Net Partnership on June 1st, 20X9. Now, Nothing-But-Net must adopt its required tax year-end. The partners' year-ends, profits interests, and capital interests are reflected in the table below. Given this information, what tax year-end must Nothing-But-Net use and what rule requires this year-end? $\begin{array} {c } { \text { Nothing-But-Net Partnership } } \end{array}$ $\begin{array} { | c | c | c | c | } \hline & \text { Year-End } & \text { Profits } & \text { Capital } \\\hline \text { Jordan, Inc. } & 4 / 30 & 45 \% & 25 \% \\\hline \text { Bird, Inc. } & 9 / 30 & 25 \% & 25 \% \\\hline \text { Ewing, Inc. } & 10 / 31 & 0 \% & 25 \% \\\hline \text { Barkley, Inc. } & 12 / 31 & 30 \% & 25 \% \\\hline\end{array}$

Which of the following statements regarding the rationale for adjusting a partner's basis is false?

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

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

Which of the following statements regarding the process for determining a partnership's tax year-end is true?

Jay has a tax basis of $14,000 in his partnership interest at the beginning of the partnership tax year. The following amounts of partnership debt were allocated to Jay and are included in his beginning of the year tax basis: (1) recourse debt - $3,000, (2) qualified nonrecourse debt - $1,000, and (3) nonrecourse debt - $500. If Jay is allocated a $15,000 loss for the current year, how much of the loss will be suspended under the tax basis and at-risk limitations?

Under general circumstances, debt is allocated from the partnership to each partner in the following manner:

On January 1, 20X9, Mr. Blue and Mr. Grey each contributed $100,000 to form the B&G general partnership. Their partnership agreement states that they will each receive a 50% profits and loss interest. The partnership agreement also provides that Mr. Blue will receive an annual $36,000 guaranteed payment. B&G began business on January 1, 20X9. For its first taxable year, its accounting records contained the following information. $\begin{array}{c}\begin{array}{lll}\text{Gross receipts from sales}\\\text{Cost of sales}\\\text{Gross profit}\\\\\text{Guaranteed payments to Mr. Blue}\\\text{Interest paid on business debt}\\\text{Dividend income}\\\text{Tax exempt interest}\\\text{Operating expenses}\\\text{Depreciation expense}\\\text{Sec. 1231 Gains}\\\end{array}\begin{array}{lll}&&\end{array}\begin{array}{lll} \$ 150,000 \\(\$ 2 2 0 , 0 0 0)\\(\$ 70,000)\\\\(\$36,000)\\(\$ 3,000)\\\$ 500 \\ \$ 1,500 \\(\$138,000)\\ (\$ 9,000) \\ \$ 8,000\\ \end{array}\end{array}$

How does a partnership make a tax election for the current year?

Alfred, a 33% profits and capital partner in Pizzeria Partnership, needs help in adjusting his tax basis to reflect the information contained in his most recent Schedule K-1 from the partnership. Unfortunately, the Schedule K-1 he recently received was for year 3 of the partnership, but Alfred only knows that his tax basis at the beginning of year 2 of the partnership was $23,000. Thankfully, Alfred still has his Schedule K-1 from the partnership for years 1 and 2. Using the following information from Alfred's year 1, year 2, and year 3 Schedule K-1, calculate his tax basis the end of year 2 and year 3. $\begin{array}{c}\begin{array}{lll}\text{Year 1:}\\\text{Ordinary business income}\\\text{Cash distribution}\\\text{Alfred's share of partnership debt}\\\text{Guaranteed payment}\\\text{Nondeductible expense}\\\text{Tax-exempt income}\\\\\text{Year 2:}\\\text{Ordinary business loss}\\\text{Cash contribution}\\\text{Alfred's share of partnership debt}\\\text{Guaranteed payment}\\\text{Nondeductible expense}\\\text{Tax-exempt income}\\\\\text{Year 3:}\\\text{Ordinary business loss}\\\text{Alfred's share of partnership debt}\\\text{Nondeductible expenses}\\\text{Guaranteed payment}\\\end{array}\begin{array}{lll}&&\end{array}\begin{array}{lll}\\\$ 10,000 \\\$ 7,000 \\\mathbf{\$ 8 5 , 0 0 0} \\(\$ 4,500) \\(\$ 1,000) \\\$ 1,200 \\\\\\(\$ 5,000) \\\$ \mathbf{1 0 , 0 0 0} \\\mathbf{\$ 7 3 , 0 0 0} \\(\mathbf{\$ 7 , 5 0 0}) \\(\$ 3,000) \\\$ 1,500 \\\\\\(\$ \mathbf{1 3}, \mathbf{0 0 0})\\\mathbf{\$ 5 8 , 0 0 0} \\ (\$ 3,000) \\(\$ 7,500) \\\end{array}\end{array}$

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.

A partner's tax basis or at-risk amount can be increased by making capital contributions, by paying off partnership debt, or by increasing the profitability of the partnership.

Ruby's tax basis in her partnership interest at the beginning of the partnership's tax year was $13,000. The following items were included in her Schedule K-1 from the partnership for the year: Cash Distribution $\mathbf { \quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\$ 2 , 0 0 0 }$ Ordinary Business Loss $\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad \mathbf {(\$ 1 4 , 0 0 0 ) }$ Short-Term Capital Gains $\mathbf { \quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\$ 2 , 0 0 0 }$ Reduction in Ruby's Share of Partnership Debt $\mathbf {\quad\quad\quad\quad\quad\quad\quad\quad \$ 4 , 0 0 0 }$

In what order are the loss limitations for partnerships applied?