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Larry Tunnell. Taxation Essentials of LLCs and Partnerships
Table of Contents
Guide
Pages
TAXATION ESSENTIALS OF LLCS AND PARTNERSHIPS
Chapter 1 Overview: Basic Tax Structure of Partnerships and LLCs
What is a partnership for federal income tax purposes?
Partnerships versus other entities. Legal protection
Example 1-1
Example 1-2
Knowledge check
Example 1-3
Knowledge check
Example 1-4
Knowledge check
Layers of taxation
Example 1-5
Example 1-6
Flexibility
Example 1-7
Example 1-8
Electing to be taxed as a partnership: The “check-the-box” rules
Example 1-9
Example 1-10
Overview of the basic framework of partnership taxation
Example 1-11
Example 1-12
Partnership operations. Measuring and reporting partnership income
Example 1-13
Knowledge check
Example 1-14
Example 1-15
Effect on the partners: Basis
Example 1-16
Example 1-17
Example 1-18
Effect on the partners: Rights to partnership assets
Example 1-19
Example 1-20
Knowledge check
Self-employment tax issues
Example 1-21
Notes
Chapter 2 Tax Consequences of Partnership or LLC Formation
Determination of basis
Effect of entity operations
Effect of liabilities. General
Gain under Section 731: Deemed distributions
Example 2-1
Contribution of encumbered property
Example 2-2
Knowledge check
Example 2-3
Knowledge check
Section 752(c)
Knowledge check
Example 2-4
Determination of tax year
Example 2-5
Exceptions
Knowledge check
Partnership interests obtained for services. Section 721
Section 83
Capital versus profits interest
Transfer of a capital interest. Effect on the service partner
Consequences for other partners
Example 2-6
Risk of forfeiture
Example 2-7
Transfer of a profits interest. IRS “safe harbor”
Exception for fee waivers
Background—Valuation of profits interests in general
Post-Diamond activity
Campbell
Application of Section 721
Relevance of Section 707
Employee versus partner
Importance of valuation
Lessons for tax advisers
Notes
Chapter 3 Partnership Distributions
Introduction
Current distributions—Proportionate. General
Timing of cash distributions
Knowledge check
Example 3-1
Distribution of non‐cash assets: General
Example 3-2
Knowledge check
Accounting for distributions when basis in property exceeds basis in partnership interest
Example 3-3
Distribution of multiple properties
Example 3-4
Distributions of encumbered property
Example 3-5
Liquidating distributions: Proportionate. In general
Recognition of loss
Example 3-6
Example 3-7
Series of distributions
Basis in property received
Example 3-8
Example 3-9
Holding period of distributed property
Example 3-10
Sale of distributed property
Example 3-11
Section 736: Death or retirement of a partner from professional services partnerships or LLCs. General application of Section 736
Example 3-12
Example 3-13
Structuring the transaction to avoid Section 736
Notes
Chapter 4 Compensatory Payments to Partners
Introduction. Distinguishing between acting as a partner and acting as a third party
Payments to partners in their capacity as an independent third party
Example 4-1
Knowledge check
Section 707(a)(2): Disguised payments
Disguised payments for services
Payments to partners in their capacity as partners
Example 4-2
Example 4-3
Knowledge check
Tax treatment of guaranteed payments. Character of income and deduction
Example 4-4
Timing of inclusion of a guaranteed payment in a partner's income
Example 4-5
Effect of the guaranteed payment on a partner's basis and capital account
Guaranteed payments and self‐employment income
Payments for rent and royalties
Capitalized guaranteed payments
Example 4-6
Minimum guaranteed payments
Example 4-7
Example 4-8
Self‐employment income of partners
General partners
Limited partners
Example 4-9
Community property
Proposed regulations concerning limited partners' self‐employment income
General definition of a limited partner
Exception for holders of more than one class of interest
Exception for holders of only one class of interest
Example 4-10
LLC members
Notes
Chapter 5 At‐Risk and Passive Activity Limits
Overview. Statutory limitations on the deductibility of losses
Example 5-1
Disallowed losses are carried forward. Carryforwards under Section 704(d)
Example 5-2
Carryforwards under Section 465
Example 5-3
Example 5-4
Example 5-5
Example 5-6
Knowledge check
Carryforwards under Section 469 (passive loss carryforwards)
Example 5-7
Knowledge check
Basis and at‐risk limitations. The concept of tax basis as a limit to the deductibility of losses
Example 5-8
Accounting for indebtedness
Example 5-9
Nonrecourse debt
Example 5-10
At‐risk rules of Section 465
Example 5-11
Passive loss limitations. General
Example 5-12
Example 5-13
Passive activity losses
Example 5-14
Passive activity credits
Knowledge check
Gross income from passive activities
Gain from sale or disposition of property
Gain from sale of an interest in a partnership or LLC
Example 5-15
Special rule for substantially appreciated property
Example 5-16
Passive activity deductions
Who is subject to the passive loss limitations?
What are passive activities?
Material participation
The standards for material participation
Example 5-17
What constitutes participation?
Limited partners
Rental activities
Exceptions
Real estate professionals
Exemption for rental activities in which taxpayer “actively” participates
Example 5-18
Modified adjusted gross income
Example 5-19
Knowledge check
Activities that are not passive activities
Re‐characterization of passive activities as nonpassive
Rules of application
Example 5-20
Example 5-21
Example 5-22
Example 5-23
Installment sales
Example 5-24
Gifts
Example 5-25
Dispositions by death
Example 5-26
Grouping activities
Appropriate economic units
Example 5-27
Limitations on grouping certain activities. Rental versus trade or business activities
Example 5-28
Knowledge check
Real versus personal property rentals
Limited partners
Publicly traded partnerships
Consistency is required
Notes
Chapter 6 Overview of Profit and Loss Allocations: General Rules and Restrictions
Introduction
Section 704(b): Allocations must have “substantial economic effect” General requirements: “Economic effect”
Maintenance of capital accounts
Example 6-1
Knowledge check
Optional revaluation of partnership assets
Example 6-2
Liquidating distributions
Restoration of deficit capital balances
Deemed economic effect
Alternate test for economic effect
Partial economic effect
Example 6-3
Knowledge check
Substantiality
Example 6-4
Example 6-5
Knowledge check
Nonrecourse deductions. Overview
Minimum gain chargeback
Example 6-6
Allocations with respect to contributed property: Section 704(c)(1)(A) Overview
General rules
Gain or loss on sale of contributed property
Example 6-7
Example 6-8
Example 6-9
Knowledge check
Cost recovery deductions
Example 6-10
Example 6-11
Allocations in family partnerships: Section 704(e)
Example 6-12
Notes
Chapter 7 Reporting Taxable Income for Partnerships and LLCs
Overview: Partnership tax return. The partnership tax return
Knowledge check
Who must file?
Exception: Spouses jointly operating a business
Filing requirements
Knowledge check
Unified audit procedures
Accounting methods and other elections
Example 7-1
Example 7-2
The tax matters partner
General tax payment and reporting scheme. Payment of tax liability
Example 7-3
Knowledge check
Aggregated versus separately stated items: Form 1065 versus Schedule K
Schedules L, M‐1, M‐2, and M‐3
Form 1065: Income. Gross profit from sales
Income from other pass‐through entities
Net farm profit (loss)
Sale or exchange of property. Business‐use assets: Form 4797
Example 7-4
Capital assets: Schedule D
Assets used in rental activities
Recapture under Section 179
Knowledge check
Sale or exchange between the partnership or LLC and a partner or member
Other income
Form 1065: Expenses. Salaries and wages
Payments to partners
Example 7-5
Knowledge check
Example 7-6
Example 7-7
Repairs
Bad debts
Rents
Taxes and licenses
Interest expense
Example 7-8
Depreciation and amortization
Example 7-9
Example 7-10
Depletion
Retirement plans and employee benefit programs
Other deductions
Section 199A Qualified business income deduction
Schedules K and K‐1. General scheme
Example 7-11
Net income from Form 1065 and allocation among partners
Example 7-12
Example 7-13
Rental real estate activities
Other rental activities
Guaranteed payments to partners
Portfolio income
Section 1231 gain or loss
Other income (loss)
Section 179 deduction
Charitable contributions
Investment interest expense
Section 59(e)(2) expenditures
Other deductions
The Tax Cuts and Jobs Act of 2017—The pass‐through income deduction
Knowledge check
Self‐employment income
Credits
Adjustments and tax preference items
Other information
Classification of Schedule K amounts
Interpreting Schedule K‐1. Information provided in Parts I and II of Schedule K‐1
Basis
Example 7-14
Amount at risk
Notes
Appendix A SAMPLE PARTNERSHIP TAX RETURN. Facts and financial data
Partnership trial balance
Notes to accompany trial balance
Kachina Properties: 2018 tax return and accompanying forms and schedules
Discussion of key figures in return
Tax Glossary
Index
TAXATION ESSENTIALS OF LLCS AND PARTNERSHIPS
Solutions. Chapter 1. Knowledge check solutions
Chapter 2. Knowledge check solutions
Chapter 3. Knowledge check solutions
Chapter 4. Knowledge check solutions
Chapter 5. Knowledge check solutions
Chapter 6. Knowledge check solutions
Chapter 7. Knowledge check solutions
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