Unit 10: Partnerships in General for EA

What is the definition of a partnership for federal tax purposes?

An unincorporated business with two or more owners where the individual partners report their share of income and loss on their personal tax returns.

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Which types of organizations are prohibited from being classified as partnerships?

A corporation
A joint-stock company or association
Insurance companies and banks
A government entity
Any organization taxed as a corporation by the IRS
Certain foreign organizations
Tax-exempt organizations
Real estate investment trusts (REITs)
Trusts or estates
Organizations electing corporate classification via Form 8832 or 2553

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What is the default tax classification for a multi-member LLC?

A partnership, unless it files Form 8832 or 2553 to elect treatment as a C corporation or S corporation.

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When must a partnership file Form 1065, U.S. Return of Partnership Income?

By the fifteenth day of the third month following the close of the tax year; for calendar-year partnerships, this is March 15.

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What is the purpose of Schedule K-1 for a partnership?

To report each partner’s distributive share of the partnership’s income, deductions, credits, and other items. The partner uses this information to complete their individual tax return (generally reported on Schedule E of Form 1040).

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What is the penalty for late filing of Form 1065 in the 2025 tax year?

$255 per month, per partner, for up to 12 months.

For each failure to furnish Schedule K-1 to a partner in 2024, the penalty is $330 per each late-filed K-1.

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Fill in the blank:

Partnerships must e-file Form 1065 and related forms if they file ______ or more returns of any type during the tax year.

ten

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In a general partnership, what liability do the partners have?

Unlimited liability for partnership debts.

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What distinguishes a limited partnership from a general partnership?

General partners: Manage the business and have unlimited personal liability for partnership debts.
Limited partners: Do not participate in management, have no obligation to contribute additional capital, and their liability is limited to their investment.

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What is a Qualified Joint Venture?

(QJV)

A business jointly owned and operated by spouses who file a joint return. A QJV can elect out of partnership treatment, allowing each spouse to report their share of income and expenses on separate Schedules C and separate Schedule SE.

Both spouses must materially participate in the business and elect not to be treated as a partnership.

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What happens when a family member receives a gift of a capital interest in a partnership where capital is a material income-producing factor?

The donee’s distributive share of partnership income is limited to the income attributable to the gifted interest. The donor must still report income attributable to any portion they retain.

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How are organizational and start-up costs for a partnership treated?

Up to $5,000 of organizational costs and $5,000 of start-up costs may be deducted in the year the partnership begins business, reduced dollar-for-dollar when costs exceed $50,000. Any remaining costs must be amortized over 180 months (15 years).

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What happens if a partnership’s organizational or start-up costs exceed $50,000?

The immediate $5,000 up-front deduction is reduced dollar-for-dollar by the amount exceeding the $50,000 threshold.

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What are special partnership allocations?

Allocations of income, gain, loss, or deductions that are not in proportion to ownership interests. They are permitted only if they have substantial economic effect—meaning the allocation must reflect the partners’ actual economic arrangement, not just reduce taxes.

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What are guaranteed payments in a partnership?

Compensation provided to a partner for services rendered or capital contributed, regardless of the partnership’s profitability.

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How are guaranteed payments treated for tax purposes?

Deducted by the partnership as a business expense
Reported to the partner receiving the payment on their Schedule K-1
Reported as ordinary income by the partner

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Are guaranteed payments subject to income tax withholding by the partnership?

Guaranteed payments are not subject to withholding like employee wages. Instead, they are reported as ordinary income to the partner and are generally subject to self-employment tax.

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What items must be separately stated on a partnership’s return?

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Items that retain their character for partners, including:

capital gains and losses
Section 1231 gains/losses
charitable contributions
dividends and interest
foreign taxes
Section 179 deductions
tax-exempt income with related expenses

How are contributions to a partnership treated under IRC Section 721?

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Generally, neither the partner nor the partnership recognizes gain or loss in connection with contributions.

What determines the basis of property contributed to a partnership?

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The adjusted basis of the property contributed by the partner, including any gain recognized by the partner in connection with the contribution.

The partner’s holding period fo the property is also carried over.

What is a ‘disguised sale’ in the context of partnership contributions?

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A transaction where a partner contributes property to a partnership and then receives a distribution of cash or other property, which the IRS may recharacterize as a sale.

A distribution within 2 years of the contribution is generally presumed to be a disguised sale.

What is the tax treatment for a partner who receives a capital interest in exchange for services?

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The partner must recognize ordinary income equal to the fair market value of the partnership interest transferred in exchange for their services.

The amount is treated as a guaranteed payment on the partnership tax return.

What is a partner’s outside basis in a partnership?

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A partner’s tax basis in their partnership interest, starting with contributions and adjusted for income, losses, and distributions.

What increases a partner’s outside basis in a partnership?

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Additional cash contributions
Adjusted basis of additional non-cash contributions
Increased share of partnership liabilities
Distributive share of taxable and nontaxable partnership income
Distributive share of excess depletion deductions over the basis of depletable property

What is a '**capital account**' in a partnership?

A measure of a partner’s **financial interest** in the partnership, computed using the tax basis method. ## Footnote Liabilities do not impact the capital account, and the capital account can be reduced below $0.

How does assuming partnership debt **affect** a partner’s basis?

It is treated as if the partner contributed cash or property to the partnership, increasing their outside basis.

What happens if a partner’s share of partnership liabilities **decreases**?

The decrease is treated as a distribution to the partner, reducing their outside basis.

What is the '**outside basis**' limitation on partnership losses?

A partner cannot deduct losses that exceed their partnership basis, and disallowed losses are carried forward until there is sufficient basis.

What does the '**at-risk**' rule limit?

The **deductibility of losses** to the partner’s investment in the partnership, excluding most nonrecourse debt.

# True or False: A partner can take losses based on partnership liabilities if they are not personally liable for the debt.

False ## Footnote A partner is prohibited from taking losses based on partnership liabilities unless they would be forced to satisfy the debt with their own personal assets.

What is the purpose of **Form 6198**, At-Risk Limitations, and when must it be filed?

It is used to figure the deductible loss from an at-risk activity. It must be filed if the taxpayer claims a loss from a business or income-producing activity subject to the at-risk rules. ## Footnote Form 6198 is used to calculate profit or loss from an at-risk activity for the current year.

What is the purpose of **Form 8582**, Passive Activity Loss Limitations, and when must it be filed?

It is used to calculate the deductible passive activity loss for the current year. It must be filed with the taxpayer’s return when passive activity losses are limited by the passive activity rules. ## Footnote The passive activity loss rules deal with a partner’s participation in an activity, distinct from the at-risk rules.

What **conditions** must be met for a partner to be considered to have assumed a partnership liability?

The partner is personally liable for it, and: * The creditor knows the liability was assumed by the partner * The creditor can demand payment from the partner * No other partner or related person will bear the economic risk of loss immediately after the assumption

What **factors** affect the impact of liabilities on an individual partner’s basis?

* Whether the liability is recourse or nonrecourse * Whether the partner is a general or limited partner

# Fill in the blank: A nonrecourse liability is usually secured by an \_\_\_\_\_\_ or property, and the creditor has no claim against the owner of the property.

asset ## Footnote In a nonrecourse liability, the creditor may have a claim against the property itself but not against the owner.

What is a **recourse liability**?

A liability where individual partners have an **economic risk of loss**. ## Footnote A partner has an economic risk of loss to the extent they would be obligated to make payments to a creditor in the event of a constructive liquidation.

When does a limited partner’s basis generally **not get affected** by the partnership’s recourse liabilities?

When the limited partner **does not personally guarantee** a partnership liability or make a direct loan to the partnership.

# True or False: Partners in a **partnership** are considered employees and receive Forms W-2.

False

How are **special partnership allocations** different from S corporation allocations?

Partnerships have **flexibility** to allocate income, gain, loss, or deductions in ways that reflect substantial economic effect, unlike S corporations, which must report all income and expenses proportionally to stock ownership.

How are **guaranteed payments** treated for tax purposes?

* Deducted by the partnership as a business expense. * Reported to the partner as ordinary income. * Subject to self-employment tax.

What types of items are not included in **partnership ordinary business income**, but are separately stated to partners?

Items such as: * Rental income * Charitable contributions * Captial gains and losses * Section 1231 gains and losses * Interest income * Dividends * Separately computed deductions and credits

# True or False: A **'profits interest'** in a partnership is generally taxable when received.

False

What decreases a partner’s **(outside) basis** in the partnership?

* The money and the adjusted basis of property distributed to the partner by the partnership. * The partner’s distributive share of the partnership’s losses and nondeductible partnership expenses. * The partner’s deduction for depletion for any partnership oil and gas wells, up to the proportionate share of the adjusted basis of the wells allocated to the partner.

Unit 10: Partnerships in General Flashcards

Understand partnership formation, taxation, and reporting. (43 cards)