Chapter 10
Partnership Taxation
Income Tax Fundamentals 2014
Student Slides
Gerald E. Whittenburg
Martha Altus-Buller
Steven Gill
2014 Cengage Learning
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Nature of Partnership Taxation
 Partnerships
must file an
informational tax return called Form
1065
◦
Partnership itself does not pay tax; rather,
income/expenses ‘flow through’ to
partners
◦ Partnership income taxable to partner,
even if he/she does not receive cash!!
 Partnerships
must make various
elections (depreciation and inventory
methods, for example)
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What is a Partnership?
 A partnership
is a syndicate, group,
pool, joint venture or other
unincorporated organization through
which any business, financial
operation or venture is carried
 Partnerships
are legal entities under
civil law
 In
most states they have rights under
Uniform Partnership Act
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Partnership Formation
 When
forming a partnership, individuals
contribute assets to partnership in
exchange for a partnership interest
 No
gain/loss is usually recognized
 Exceptions include
◦ When services are performed in exchange for
partnership interest
◦ When property is contributed with liabilities in
excess of basis, then
Recognized Gain = Liabilities Allocable to Others –
Adjusted Basis of Property Contributed
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Changes in Partner’s Basis
Changes occur to partner’s basis due to subsequent activities
Beginning Basis
+ Additional Contributions
+ Share of Net Ordinary Taxable Income
+ Share of Capital Gains/Other Income
-
Distributions of Property or Cash
-
Share of Net Loss from Operations*
-
Share of Capital Losses/Other Deductions
+/- Increase/Decrease in Liabilities
Basis in Partnership Interest
*Note: Can’t take basis below 0 and must comply with at-risk limitations
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Partnership Income Reporting

Partnerships do not pay tax
◦
All information flows through to be reported by the
partners
◦ Tax return is due by the 15th of the 4th month
following close of partnership tax year

Must report each element of income and expense
separately on Form 1065 (Partnership Tax Return)
◦
Schedule K-1 shows allocable partnership
income/expenses for each partner, based upon the
individual ownership percentage


Ordinary income/loss
Special income/deduction items such as charitable
deductions, interest, capital gains/losses
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2014 Cengage Learning
1099-K Reporting Merchant Card
& Third-Party Payments
 Banks
and online payments networks (like
PayPal) are required to send 1099-Ks to
all merchants with more than $20,000 of
sales and more than 200 transactions
 Form
1099-K is a new and potentially
powerful IRS enforcement tool for
matching business income to sellers’ tax
returns
2014 Cengage Learning
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Limited Liability Companies

Limited Liability Companies (LLCs) have attributes
of both partnerships and corporations

Advantages of LLCs are numerous
◦
Taxable income/loss passes through to owners
◦
No general partner requirement
◦
Owners can participate in management
◦
Owners have limited liability
◦
LLC ownership interest is not a security
◦
Tax attributes pass through to owners
◦
Offer greater tax flexibility than S corporations (single
member LLCs are very common)
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Limited Liability Companies
 Disadvantages
of LLCs
◦
Because of newness, limited amount of case
law dealing with limited liability companies
◦
States are not uniform in treatment of LLCs, so
potential for confusion if LLC is operating in
more than one state
LLCs are quickly becoming a major form of business organization
in the U.S.
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