PARTNERSHIPS: FORMATION, OPERATION, AND BASIS

If the Partnership makes a Distribution then BOTH the Capital Account and the Tax Basis are REDUCED by the amount of the Distribution.

| A general partnership allows for a pooling of capital and talent and a sharing of the risk. Additional benefits to a general partnership include additional expertise in decision making and a sharing of the workload. General partnerships are easy and inexpensive to start up.

• Income Taxes: S- Corporations are tax paying entity, the business files tax returns but not taxed on earnings. The stockholders claim losses or profits on their personal tax returns.

A2c. Profit or Loss from the Sale of Property: The taxpayer couple sold personal and rental property for this tax period. Both sales have potential gains. However, the gain from the sale of the personal residence qualifies for exclusion up to $500,000 under Section 121 as they lived in and used the residence at least two of the five years prior to the sale. The gain or loss is calculated as the sale price less selling costs and adjusted basis of the property. Proceeds from the sale of the rental property are taxable because it is an income producing property and would be considered normal income. However, Section 1231 designates that exchanges of business property held longer than one year may be considered a long-term capital gain if there is a gain realized and any loss would be considered an ordinary loss. Any depreciation taken in past tax years will need to be recaptured in the tax year of the sale.

Federal tax rates on corporate taxable income vary from 15% to 35%. State and local taxes and rules vary by jurisdiction, though many are based on Federal concepts and definitions. Taxable income may differ from book income both as to timing of income and tax deductions and as to what is taxable. Corporations are also subject to a Federal Alternative Minimum Tax and alternative state taxes. Like individuals, corporations must file tax returns every year. They must make quarterly estimated tax payments. Controlled groups of corporations may file a consolidated return. Partnerships have flow-through taxation which means that the entity does not pay taxes on its income. Instead, the owners of the entity pay tax on their "distributive share" of the entity's taxable income, even if no funds are distributed by the partnership to the owners. Estates and nongrantor trusts must file income tax returns just as individuals do, but with some important differences. For one, their income is taxed at either the entity or beneficiary level depending on whether it is allocated to principal or allocated to distributable income, and whether it is distributed to the beneficiaries. And because their exemption amounts, tax brackets and related thresholds haven’t been indexed for inflation or modified for tax relief to the extent those for individuals have, they can be

Use the partnership and corporate tax returns for the practice sets titled, “Pet Kingdom” and “ROCK the Ages, LLC” that you prepared in Weeks 3 and 5 in order to complete this assignment.

The partners report the shares of the income or losses from the partnership on their individual taxes.

Generally, an S corporation does not pay corporate level tax, as C corporations do. The corporate income, whether distributed or not, is always taxed to the shareholders, and the shareholders assets and bank accounts are protected from any business

Anderson, K. E., Pope, T. R., & Kramer, J.L., 2010, Prentice Hall’s Federal Taxation 2010: Corporations, partnerships, estates, & Trusts, 23rd Ed, Upper saddle River New Jersey, Prentice Hall

Equality between inside basis and outside basis in Subchapter K is central to its configuration. Partnerships are intended to provide taxpayers with an entity carrying a single layer of tax. The inside-outside basis equality ensures that result. Absent nonrecognition provisions, when a third party purchases, or receives by bequest, a partnership interest, the transferee’s receives cost basis or fair market value basis. That cost includes the partnership liabilities attributable to the acquired interest.

- Each partner would be taxed on share of partnership income and would be viewed as owning a direct interest in each partnership asset.

Individuals are allowed a reduction of taxable income on their form 1040 personal income tax return known as a loss, when the taxpayer suffers an economic loss during the taxable year and was not compensated by insurance. Determining the deductible amount of the loss can be difficult. The loss from the sale of property should be equal to the adjusted basis or the basis after making the necessary adjustments such as capital improvements or accumulated depreciation. When determining the amount of the loss there are some exceptions to the deductibility of the loss known as loss limitations. This paper will focus mainly on three possible loss limitations that individuals can run into when calculating their deductible loss: basis limitations,

Prior to the implementation of the Internal Revenue Code of 1954, the character of gain produced by the sale of a partnership interest was uncertain. It was not clear if the sale should be viewed as a sale of a single capital asset, or the sale of undivided interests in partnership assets which

Limited liability companies (LLC) or limited liability partnerships (LLP) represent flow-through entities that are taxed to the individual owners. Both types of entities represent companies that are not automatically classified as an S corporation. Under the “Check the Box” system, each must make an election to be taxed as an S corporation

S corporations passes through its ordinary income or loss to the shareholders. The shareholders report those on their individual tax returns.