Click to edit Master title style,Click to edit Master text styles,Second Level,Third Level,Fourth Level,Fifth Level,CCH Federal Taxation Comprehensive Topics,*,Click to edit Master title style,Click to edit Master text styles,Second Level,Third Level,Fourth Level,Fifth Level,CCH Federal Taxation Comprehensive Topics,*,Chapter 19,Partnerships,Formation and Operation,2021 CCH.All Rights Reserved.,4025 W.Peterson Ave.,Chicago,IL 60646-6085,1 800 248 3248,CCH Federal Taxation Comprehensive Topics,2,of 51,Chapter 19,Exhibit 1,PartnershipsOverview,Definition of Partnership.,An unincorporated association with two or more persons who associate for a profit motive.,For income tax purposes,partnerships are generally treated as pass-through entities,i.e.,the partnership pays no taxes,and partnership income(loss)and separately stated items are allocated to each partner according to the partnerships profit sharing agreement.,The partners receive separate K-1 schedules from the partnership.Each K-1 reports each partners share of the partnership net profit and separately reported income and expense items.Partners report these items on their own 1040 tax returns,even if none of the items have been distributed to them.,Characteristics of a Partnership,Partner any member of a partnership,Partnership agreements Desirable to have,Classification Check-the-box,can elect to be taxed as a partnership or C-corp,Tax Filing 15,th,day of 4,th,month following the close of the partnerships tax year.Each partner receives a K-1.,CCH Federal Taxation Comprehensive Topics,3,of 51,CCH Federal Taxation Comprehensive Topics,4,of 51,Chapter 19,Exhibit 2a,PartnershipsTypes of Partnerships,General Partnership GP.,A GP has one or more general partners who is personally liable for partnership debts;a general partner can be bankrupted by a malpractice judgment brought against the partnership,even though the partner was not personally involved in the malpractice.,Limited Liability Partnership LLP.,An LLP is a general partnership in which the general partners are not liable for any malpractice committed by the other general partners.,Limited Partnership LP.,An LP is comprised of at least one general partner and often many limited partners.Limited partners may not participate in the management of the LP,and their risks of loss are restricted to their equity investments in the LP.,Limited Liability Limited Partnership LLLP.,An LLLP is a limited partnership in which the general partners are not liable for the negligence or misconduct of the other general partners.,CCH Federal Taxation Comprehensive Topics,5,of 51,Chapter 19,Exhibit 2b,Limited Liability Company LLC.An LLC is a state-registered association generally taxed as a partnership if it“checks the box.LLC members,like corporate shareholders are not personally liable.Unlike limited partners,LLC members may participate in management without risking personal liability.However,guaranteed payments are subject to self-employment tax,along with the members share of ordinary income or loss from the LLC.,PartnershipsTypes of Partnerships,CCH Federal Taxation Comprehensive Topics,6,of 51,Tax Formula,Code Sec.702(a)(8)Ordinary Income,=,Operating Expenses,Gross Income from Business Operations,=,Exclusions,and Cost of Goods Sold,Ordinary Income“From Whatever Source Derived”(including Code Sec.1245 recapture),Taxation at Owner Level,Chapter 19,Exhibit 3,CCH Federal Taxation Comprehensive Topics,7,of 51,Outside Basis Computations,How is the partners outside basis in the partnership(P/S)determined?,Code Sec.722 and related regulations provide the following formula:,+Basis in contributed property,+/Share of P/Ss taxable income or loss under Code Sec.702(a)(8)(i.e.,earned income/loss,both active and passive),+/Share of“separately stated items,+Gain recognized by partner on services contributed,+Gain recognized by partner on excess debt relief,+Share of debt assumption(if recourse debt,%share is based on%share of P/S loss;if non-recourse debt,%share is based on%share of P/S profits.Both%are usually the same.),Share of P/S losses,Debt relief,Basis of property distributions,including cash,=Partners outside basis of partnership interest,Chapter 19,Exhibit 7a,CCH Federal Taxation Comprehensive Topics,8,of 51,Special basis rules:,1.Losses may not reduce basis below zero.Instead,they remain suspended until more basis is acquired,for example,through contributions or income.,2.Basis is reduced by the amount of any released losses previously suspended under the at-risk rules.,3.No separate adjustment to basis is generally made for guaranteed payments received by a partner from his P/S.The reason:Guaranteed payments are included in the partners income,which would increase his basis,but they are accompanied by a cash distribution,which simultaneously reduces basis.,Chapter 19,Exhibit 7b,Outside Basis Computations,CCH Federal Taxation Comprehensive Topics,9,of 51,Inside Basis Computations,How is a partnerships inside basis in pr