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Hand R Block Free File

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Hand R Block Free File

Hand r block free file Publication 541 - Main Content Table of Contents Forming a PartnershipOrganizations Classified as Partnerships Family Partnership Partnership Agreement Terminating a PartnershipIRS e-file (Electronic Filing) Exclusion From Partnership Rules Partnership Return (Form 1065) Partnership DistributionsSubstantially appreciated inventory items. Hand r block free file Partner's Gain or Loss Partner's Basis for Distributed Property Transactions Between Partnership and PartnersGuaranteed Payments Sale or Exchange of Property Contribution of Property Contribution of Services Basis of Partner's InterestAdjusted Basis Effect of Partnership Liabilities Disposition of Partner's InterestSale, Exchange, or Other Transfer Payments for Unrealized Receivables and Inventory Items Liquidation at Partner's Retirement or Death Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA)Partnership Item. Hand r block free file Small Partnerships and the Small Partnership Exception Small Partnership TEFRA Election Role of Tax Matters Partner (TMP) in TEFRA Proceedings Statute of Limitations and TEFRA Amended Returns and Administrative Adjustment Requests (AARs) How To Get Tax Help Forming a Partnership The following sections contain general information about partnerships. Hand r block free file Organizations Classified as Partnerships An unincorporated organization with two or more members is generally classified as a partnership for federal tax purposes if its members carry on a trade, business, financial operation, or venture and divide its profits. Hand r block free file However, a joint undertaking merely to share expenses is not a partnership. Hand r block free file For example, co-ownership of property maintained and rented or leased is not a partnership unless the co-owners provide services to the tenants. Hand r block free file The rules you must use to determine whether an organization is classified as a partnership changed for organizations formed after 1996. Hand r block free file Organizations formed after 1996. Hand r block free file   An organization formed after 1996 is classified as a partnership for federal tax purposes if it has two or more members and it is none of the following. Hand r block free file An organization formed under a federal or state law that refers to it as incorporated or as a corporation, body corporate, or body politic. Hand r block free file An organization formed under a state law that refers to it as a joint-stock company or joint-stock association. Hand r block free file An insurance company. Hand r block free file Certain banks. Hand r block free file An organization wholly owned by a state, local, or foreign government. Hand r block free file An organization specifically required to be taxed as a corporation by the Internal Revenue Code (for example, certain publicly traded partnerships). Hand r block free file Certain foreign organizations identified in section 301. Hand r block free file 7701-2(b)(8) of the regulations. Hand r block free file A tax-exempt organization. Hand r block free file A real estate investment trust. Hand r block free file An organization classified as a trust under section 301. Hand r block free file 7701-4 of the regulations or otherwise subject to special treatment under the Internal Revenue Code. Hand r block free file Any other organization that elects to be classified as a corporation by filing Form 8832. Hand r block free file For more information, see the instructions for Form 8832. Hand r block free file Limited liability company. Hand r block free file   A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC. Hand r block free file Unlike a partnership, none of the members of an LLC are personally liable for its debts. Hand r block free file An LLC may be classified for federal income tax purposes as either a partnership, a corporation, or an entity disregarded as an entity separate from its owner by applying the rules in Regulations section 301. Hand r block free file 7701-3. Hand r block free file See Form 8832 and section 301. Hand r block free file 7701-3 of the regulations for more details. Hand r block free file A domestic LLC with at least two members that does not file Form 8832 is classified as a partnership for federal income tax purposes. Hand r block free file Organizations formed before 1997. Hand r block free file   An organization formed before 1997 and classified as a partnership under the old rules will generally continue to be classified as a partnership as long as the organization has at least two members and does not elect to be classified as a corporation by filing Form 8832. Hand r block free file Community property. Hand r block free file    Spouses who own a qualified entity (defined later) can choose to classify the entity as a partnership for federal tax purposes by filing the appropriate partnership tax returns. Hand r block free file They can choose to classify the entity as a sole proprietorship by filing a Schedule C (Form 1040) listing one spouse as the sole proprietor. Hand r block free file A change in reporting position will be treated for federal tax purposes as a conversion of the entity. Hand r block free file   A qualified entity is a business entity that meets all the following requirements. Hand r block free file The business entity is wholly owned by spouses as community property under the laws of a state, a foreign country, or a possession of the United States. Hand r block free file No person other than one or both spouses would be considered an owner for federal tax purposes. Hand r block free file The business entity is not treated as a corporation. Hand r block free file   For more information about community property, see Publication 555, Community Property. Hand r block free file Publication 555 discusses the community property laws of Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Hand r block free file Family Partnership Members of a family can be partners. Hand r block free file However, family members (or any other person) will be recognized as partners only if one of the following requirements is met. Hand r block free file If capital is a material income-producing factor, they acquired their capital interest in a bona fide transaction (even if by gift or purchase from another family member), actually own the partnership interest, and actually control the interest. Hand r block free file If capital is not a material income-producing factor, they joined together in good faith to conduct a business. Hand r block free file They agreed that contributions of each entitle them to a share in the profits, and some capital or service has been (or is) provided by each partner. Hand r block free file Capital is material. Hand r block free file   Capital is a material income-producing factor if a substantial part of the gross income of the business comes from the use of capital. Hand r block free file Capital is ordinarily an income-producing factor if the operation of the business requires substantial inventories or investments in plants, machinery, or equipment. Hand r block free file Capital is not material. Hand r block free file   In general, capital is not a material income-producing factor if the income of the business consists principally of fees, commissions, or other compensation for personal services performed by members or employees of the partnership. Hand r block free file Capital interest. Hand r block free file   A capital interest in a partnership is an interest in its assets that is distributable to the owner of the interest in either of the following situations. Hand r block free file The owner withdraws from the partnership. Hand r block free file The partnership liquidates. Hand r block free file   The mere right to share in earnings and profits is not a capital interest in the partnership. Hand r block free file Gift of capital interest. Hand r block free file   If a family member (or any other person) receives a gift of a capital interest in a partnership in which capital is a material income-producing factor, the donee's distributive share of partnership income is subject to both of the following restrictions. Hand r block free file It must be figured by reducing the partnership income by reasonable compensation for services the donor renders to the partnership. Hand r block free file The donee's distributive share of partnership income attributable to donated capital must not be proportionately greater than the donor's distributive share attributable to the donor's capital. Hand r block free file Purchase. Hand r block free file   For purposes of determining a partner's distributive share, an interest purchased by one family member from another family member is considered a gift from the seller. Hand r block free file The fair market value of the purchased interest is considered donated capital. Hand r block free file For this purpose, members of a family include only spouses, ancestors, and lineal descendants (or a trust for the primary benefit of those persons). Hand r block free file Example. Hand r block free file A father sold 50% of his business to his son. Hand r block free file The resulting partnership had a profit of $60,000. Hand r block free file Capital is a material income-producing factor. Hand r block free file The father performed services worth $24,000, which is reasonable compensation, and the son performed no services. Hand r block free file The $24,000 must be allocated to the father as compensation. Hand r block free file Of the remaining $36,000 of profit due to capital, at least 50%, or $18,000, must be allocated to the father since he owns a 50% capital interest. Hand r block free file The son's share of partnership profit cannot be more than $18,000. Hand r block free file Business owned and operated by spouses. Hand r block free file   If spouses carry on a business together and share in the profits and losses, they may be partners whether or not they have a formal partnership agreement. Hand r block free file If so, they should report income or loss from the business on Form 1065. Hand r block free file They should not report the income on a Schedule C (Form 1040) in the name of one spouse as a sole proprietor. Hand r block free file However, the spouses can elect not to treat the joint venture as a partnership by making a Qualified Joint Venture Election. Hand r block free file Qualified Joint Venture Election. Hand r block free file   A "qualified joint venture," whose only members are spouses filing a joint return, can elect not to be treated as a partnership for federal tax purposes. Hand r block free file A qualified joint venture conducts a trade or business where: the only members of the joint venture are spouses filing jointly; both spouses elect not to be treated as a partnership; both spouses materially participate in the trade or business (see Passive Activity Limitations in the Instructions for Form 1065 for a definition of material participation); and the business is co-owned by both spouses and is not held in the name of a state law entity such as a partnership or LLC. Hand r block free file   Under this election, a qualified joint venture conducted by spouses who file a joint return is not treated as a partnership for federal tax purposes and therefore does not have a Form 1065 filing requirement. Hand r block free file All items of income, gain, deduction, loss, and credit are divided between the spouses based on their respective interests in the venture. Hand r block free file Each spouse takes into account his or her respective share of these items as a sole proprietor. Hand r block free file Each spouse would account for his or her respective share on the appropriate form, such as Schedule C (Form 1040). Hand r block free file For purposes of determining net earnings from self-employment, each spouse's share of income or loss from a qualified joint venture is taken into account just as it is for federal income tax purposes (i. Hand r block free file e. Hand r block free file , based on their respective interests in the venture). Hand r block free file   If the spouses do not make the election to treat their respective interests in the joint venture as sole proprietorships, each spouse should carry his or her share of the partnership income or loss from Schedule K-1 (Form 1065) to their joint or separate Form(s) 1040. Hand r block free file Each spouse should include his or her respective share of self-employment income on a separate Schedule SE (Form 1040), Self-Employment Tax. Hand r block free file   This generally does not increase the total tax on the return, but it does give each spouse credit for social security earnings on which retirement benefits are based. Hand r block free file However, this may not be true if either spouse exceeds the social security tax limitation. Hand r block free file   For more information on qualified joint ventures, go to IRS. Hand r block free file gov, enter “Election for Qualified Joint Ventures” in the search box and select the link reading “Election for Husband and Wife Unincorporated Businesses. Hand r block free file ” Partnership Agreement The partnership agreement includes the original agreement and any modifications. Hand r block free file The modifications must be agreed to by all partners or adopted in any other manner provided by the partnership agreement. Hand r block free file The agreement or modifications can be oral or written. Hand r block free file Partners can modify the partnership agreement for a particular tax year after the close of the year but not later than the date for filing the partnership return for that year. Hand r block free file This filing date does not include any extension of time. Hand r block free file If the partnership agreement or any modification is silent on any matter, the provisions of local law are treated as part of the agreement. Hand r block free file Terminating a Partnership A partnership terminates when one of the following events takes place. Hand r block free file All its operations are discontinued and no part of any business, financial operation, or venture is continued by any of its partners in a partnership. Hand r block free file At least 50% of the total interest in partnership capital and profits is sold or exchanged within a 12-month period, including a sale or exchange to another partner. Hand r block free file Unlike other partnerships, an electing large partnership does not terminate on the sale or exchange of 50% or more of the partnership interests within a 12-month period. Hand r block free file See section 1. Hand r block free file 708-1(b) of the regulations for more information on the termination of a partnership. Hand r block free file For special rules that apply to a merger, consolidation, or division of a partnership, see sections 1. Hand r block free file 708-1(c) and 1. Hand r block free file 708-1(d) of the regulations. Hand r block free file Date of termination. Hand r block free file   The partnership's tax year ends on the date of termination. Hand r block free file For the event described in (1), above, the date of termination is the date the partnership completes the winding up of its affairs. Hand r block free file For the event described in (2), above, the date of termination is the date of the sale or exchange of a partnership interest that, by itself or together with other sales or exchanges in the preceding 12 months, transfers an interest of 50% or more in both capital and profits. Hand r block free file Short period return. Hand r block free file   If a partnership is terminated before the end of what would otherwise be its tax year, Form 1065 must be filed for the short period, which is the period from the beginning of the tax year through the date of termination. Hand r block free file The return is due the 15th day of the fourth month following the date of termination. Hand r block free file See Partnership Return (Form 1065), later, for information about filing Form 1065. Hand r block free file Conversion of partnership into limited liability company (LLC). Hand r block free file   The conversion of a partnership into an LLC classified as a partnership for federal tax purposes does not terminate the partnership. Hand r block free file The conversion is not a sale, exchange, or liquidation of any partnership interest; the partnership's tax year does not close; and the LLC can continue to use the partnership's taxpayer identification number. Hand r block free file   However, the conversion may change some of the partners' bases in their partnership interests if the partnership has recourse liabilities that become nonrecourse liabilities. Hand r block free file Because the partners share recourse and nonrecourse liabilities differently, their bases must be adjusted to reflect the new sharing ratios. Hand r block free file If a decrease in a partner's share of liabilities exceeds the partner's basis, he or she must recognize gain on the excess. Hand r block free file For more information, see Effect of Partnership Liabilities under Basis of Partner's Interest, later. Hand r block free file   The same rules apply if an LLC classified as a partnership is converted into a partnership. Hand r block free file IRS e-file (Electronic Filing) Please click here for the text description of the image. Hand r block free file e-file Certain partnerships with more than 100 partners are required to file Form 1065, Schedules K-1, and related forms and schedules electronically (e-file). Hand r block free file Other partnerships generally have the option to file electronically. Hand r block free file For details about IRS e-file, see the Form 1065 instructions. Hand r block free file Exclusion From Partnership Rules Certain partnerships that do not actively conduct a business can choose to be completely or partially excluded from being treated as partnerships for federal income tax purposes. Hand r block free file All the partners must agree to make the choice, and the partners must be able to compute their own taxable income without computing the partnership's income. Hand r block free file However, the partners are not exempt from the rule that limits a partner's distributive share of partnership loss to the adjusted basis of the partner's partnership interest. Hand r block free file Nor are they exempt from the requirement of a business purpose for adopting a tax year for the partnership that differs from its required tax year. Hand r block free file Investing partnership. Hand r block free file   An investing partnership can be excluded if the participants in the joint purchase, retention, sale, or exchange of investment property meet all the following requirements. Hand r block free file They own the property as co-owners. Hand r block free file They reserve the right separately to take or dispose of their shares of any property acquired or retained. Hand r block free file They do not actively conduct business or irrevocably authorize some person acting in a representative capacity to purchase, sell, or exchange the investment property. Hand r block free file Each separate participant can delegate authority to purchase, sell, or exchange his or her share of the investment property for the time being for his or her account, but not for a period of more than a year. Hand r block free file Operating agreement partnership. Hand r block free file   An operating agreement partnership group can be excluded if the participants in the joint production, extraction, or use of property meet all the following requirements. Hand r block free file They own the property as co-owners, either in fee or under lease or other form of contract granting exclusive operating rights. Hand r block free file They reserve the right separately to take in kind or dispose of their shares of any property produced, extracted, or used. Hand r block free file They do not jointly sell services or the property produced or extracted. Hand r block free file Each separate participant can delegate authority to sell his or her share of the property produced or extracted for the time being for his or her account, but not for a period of time in excess of the minimum needs of the industry, and in no event for more than one year. Hand r block free file However, this exclusion does not apply to an unincorporated organization one of whose principal purposes is cycling, manufacturing, or processing for persons who are not members of the organization. Hand r block free file Electing the exclusion. Hand r block free file   An eligible organization that wishes to be excluded from the partnership rules must make the election not later than the time for filing the partnership return for the first tax year for which exclusion is desired. Hand r block free file This filing date includes any extension of time. Hand r block free file See Regulations section 1. Hand r block free file 761-2(b) for the procedures to follow. Hand r block free file Partnership Return (Form 1065) Every partnership that engages in a trade or business or has gross income must file an information return on Form 1065 showing its income, deductions, and other required information. Hand r block free file The partnership return must show the names and addresses of each partner and each partner's distributive share of taxable income. Hand r block free file The return must be signed by a general partner. Hand r block free file If a limited liability company is treated as a partnership, it must file Form 1065 and one of its members must sign the return. Hand r block free file A partnership is not considered to engage in a trade or business, and is not required to file a Form 1065, for any tax year in which it neither receives income nor pays or incurs any expenses treated as deductions or credits for federal income tax purposes. Hand r block free file See the Instructions for Form 1065 for more information about who must file Form 1065. Hand r block free file Partnership Distributions Partnership distributions include the following. Hand r block free file A withdrawal by a partner in anticipation of the current year's earnings. Hand r block free file A distribution of the current year's or prior years' earnings not needed for working capital. Hand r block free file A complete or partial liquidation of a partner's interest. Hand r block free file A distribution to all partners in a complete liquidation of the partnership. Hand r block free file A partnership distribution is not taken into account in determining the partner's distributive share of partnership income or loss. Hand r block free file If any gain or loss from the distribution is recognized by the partner, it must be reported on his or her return for the tax year in which the distribution is received. Hand r block free file Money or property withdrawn by a partner in anticipation of the current year's earnings is treated as a distribution received on the last day of the partnership's tax year. Hand r block free file Effect on partner's basis. Hand r block free file   A partner's adjusted basis in his or her partnership interest is decreased (but not below zero) by the money and adjusted basis of property distributed to the partner. Hand r block free file See Adjusted Basis under Basis of Partner's Interest, later. Hand r block free file Effect on partnership. Hand r block free file   A partnership generally does not recognize any gain or loss because of distributions it makes to partners. Hand r block free file The partnership may be able to elect to adjust the basis of its undistributed property. Hand r block free file Certain distributions treated as a sale or exchange. Hand r block free file   When a partnership distributes the following items, the distribution may be treated as a sale or exchange of property rather than a distribution. Hand r block free file Unrealized receivables or substantially appreciated inventory items distributed in exchange for any part of the partner's interest in other partnership property, including money. Hand r block free file Other property (including money) distributed in exchange for any part of a partner's interest in unrealized receivables or substantially appreciated inventory items. Hand r block free file   See Payments for Unrealized Receivables and Inventory Items under Disposition of Partner's Interest, later. Hand r block free file   This treatment does not apply to the following distributions. Hand r block free file A distribution of property to the partner who contributed the property to the partnership. Hand r block free file Payments made to a retiring partner or successor in interest of a deceased partner that are the partner's distributive share of partnership income or guaranteed payments. Hand r block free file Substantially appreciated inventory items. Hand r block free file   Inventory items of the partnership are considered to have appreciated substantially in value if, at the time of the distribution, their total fair market value is more than 120% of the partnership's adjusted basis for the property. Hand r block free file However, if a principal purpose for acquiring inventory property is to avoid ordinary income treatment by reducing the appreciation to less than 120%, that property is excluded. Hand r block free file Partner's Gain or Loss A partner generally recognizes gain on a partnership distribution only to the extent any money (and marketable securities treated as money) included in the distribution exceeds the adjusted basis of the partner's interest in the partnership. Hand r block free file Any gain recognized is generally treated as capital gain from the sale of the partnership interest on the date of the distribution. Hand r block free file If partnership property (other than marketable securities treated as money) is distributed to a partner, he or she generally does not recognize any gain until the sale or other disposition of the property. Hand r block free file For exceptions to these rules, see Distribution of partner's debt and Net precontribution gain, later. Hand r block free file Also, see Payments for Unrealized Receivables and Inventory Items under Disposition of Partner's Interest, later. Hand r block free file Example. Hand r block free file The adjusted basis of Jo's partnership interest is $14,000. Hand r block free file She receives a distribution of $8,000 cash and land that has an adjusted basis of $2,000 and a fair market value of $3,000. Hand r block free file Because the cash received does not exceed the basis of her partnership interest, Jo does not recognize any gain on the distribution. Hand r block free file Any gain on the land will be recognized when she sells or otherwise disposes of it. Hand r block free file The distribution decreases the adjusted basis of Jo's partnership interest to $4,000 [$14,000 − ($8,000 + $2,000)]. Hand r block free file Marketable securities treated as money. Hand r block free file   Generally, a marketable security distributed to a partner is treated as money in determining whether gain is recognized on the distribution. Hand r block free file This treatment, however, does not generally apply if that partner contributed the security to the partnership or an investment partnership made the distribution to an eligible partner. Hand r block free file   The amount treated as money is the security's fair market value when distributed, reduced (but not below zero) by the excess (if any) of: The partner's distributive share of the gain that would be recognized had the partnership sold all its marketable securities at their fair market value immediately before the transaction resulting in the distribution, over The partner's distributive share of the gain that would be recognized had the partnership sold all such securities it still held after the distribution at the fair market value in (1). Hand r block free file   For more information, including the definition of marketable securities, see section 731(c) of the Internal Revenue Code. Hand r block free file Loss on distribution. Hand r block free file   A partner does not recognize loss on a partnership distribution unless all the following requirements are met. Hand r block free file The adjusted basis of the partner's interest in the partnership exceeds the distribution. Hand r block free file The partner's entire interest in the partnership is liquidated. Hand r block free file The distribution is in money, unrealized receivables, or inventory items. Hand r block free file   There are exceptions to these general rules. Hand r block free file See the following discussions. Hand r block free file Also, see Liquidation at Partner's Retirement or Death under Disposition of Partner's Interest, later. Hand r block free file Distribution of partner's debt. Hand r block free file   If a partnership acquires a partner's debt and extinguishes the debt by distributing it to the partner, the partner will recognize capital gain or loss to the extent the fair market value of the debt differs from the basis of the debt (determined under the rules discussed in Partner's Basis for Distributed Property, later). Hand r block free file   The partner is treated as having satisfied the debt for its fair market value. Hand r block free file If the issue price (adjusted for any premium or discount) of the debt exceeds its fair market value when distributed, the partner may have to include the excess amount in income as canceled debt. Hand r block free file   Similarly, a deduction may be available to a corporate partner if the fair market value of the debt at the time of distribution exceeds its adjusted issue price. Hand r block free file Net precontribution gain. Hand r block free file   A partner generally must recognize gain on the distribution of property (other than money) if the partner contributed appreciated property to the partnership during the 7-year period before the distribution. Hand r block free file   The gain recognized is the lesser of the following amounts. Hand r block free file The excess of: The fair market value of the property received in the distribution, over The adjusted basis of the partner's interest in the partnership immediately before the distribution, reduced (but not below zero) by any money received in the distribution. Hand r block free file The “net precontribution gain” of the partner. Hand r block free file This is the net gain the partner would recognize if all the property contributed by the partner within 7 years of the distribution, and held by the partnership immediately before the distribution, were distributed to another partner, other than a partner who owns more than 50% of the partnership. Hand r block free file For information about the distribution of contributed property to another partner, see Contribution of Property , under Transactions Between Partnership and Partners, later. Hand r block free file   The character of the gain is determined by reference to the character of the net precontribution gain. Hand r block free file This gain is in addition to any gain the partner must recognize if the money distributed is more than his or her basis in the partnership. Hand r block free file For these rules, the term “money” includes marketable securities treated as money, as discussed earlier. Hand r block free file Effect on basis. Hand r block free file   The adjusted basis of the partner's interest in the partnership is increased by any net precontribution gain recognized by the partner. Hand r block free file Other than for purposes of determining the gain, the increase is treated as occurring immediately before the distribution. Hand r block free file See Basis of Partner's Interest , later. Hand r block free file   The partnership must adjust its basis in any property the partner contributed within 7 years of the distribution to reflect any gain that partner recognizes under this rule. Hand r block free file Exceptions. Hand r block free file   Any part of a distribution that is property the partner previously contributed to the partnership is not taken into account in determining the amount of the excess distribution or the partner's net precontribution gain. Hand r block free file For this purpose, the partner's previously contributed property does not include a contributed interest in an entity to the extent its value is due to property contributed to the entity after the interest was contributed to the partnership. Hand r block free file   Recognition of gain under this rule also does not apply to a distribution of unrealized receivables or substantially appreciated inventory items if the distribution is treated as a sale or exchange, as discussed earlier. Hand r block free file Partner's Basis for Distributed Property Unless there is a complete liquidation of a partner's interest, the basis of property (other than money) distributed to the partner by a partnership is its adjusted basis to the partnership immediately before the distribution. Hand r block free file However, the basis of the property to the partner cannot be more than the adjusted basis of his or her interest in the partnership reduced by any money received in the same transaction. Hand r block free file Example 1. Hand r block free file The adjusted basis of Emily's partnership interest is $30,000. Hand r block free file She receives a distribution of property that has an adjusted basis of $20,000 to the partnership and $4,000 in cash. Hand r block free file Her basis for the property is $20,000. Hand r block free file Example 2. Hand r block free file The adjusted basis of Steve's partnership interest is $10,000. Hand r block free file He receives a distribution of $4,000 cash and property that has an adjusted basis to the partnership of $8,000. Hand r block free file His basis for the distributed property is limited to $6,000 ($10,000 − $4,000, the cash he receives). Hand r block free file Complete liquidation of partner's interest. Hand r block free file   The basis of property received in complete liquidation of a partner's interest is the adjusted basis of the partner's interest in the partnership reduced by any money distributed to the partner in the same transaction. Hand r block free file Partner's holding period. Hand r block free file   A partner's holding period for property distributed to the partner includes the period the property was held by the partnership. Hand r block free file If the property was contributed to the partnership by a partner, then the period it was held by that partner is also included. Hand r block free file Basis divided among properties. Hand r block free file   If the basis of property received is the adjusted basis of the partner's interest in the partnership (reduced by money received in the same transaction), it must be divided among the properties distributed to the partner. Hand r block free file For property distributed after August 5, 1997, allocate the basis using the following rules. Hand r block free file Allocate the basis first to unrealized receivables and inventory items included in the distribution by assigning a basis to each item equal to the partnership's adjusted basis in the item immediately before the distribution. Hand r block free file If the total of these assigned bases exceeds the allocable basis, decrease the assigned bases by the amount of the excess. Hand r block free file Allocate any remaining basis to properties other than unrealized receivables and inventory items by assigning a basis to each property equal to the partnership's adjusted basis in the property immediately before the distribution. Hand r block free file If the allocable basis exceeds the total of these assigned bases, increase the assigned bases by the amount of the excess. Hand r block free file If the total of these assigned bases exceeds the allocable basis, decrease the assigned bases by the amount of the excess. Hand r block free file Allocating a basis increase. Hand r block free file   Allocate any basis increase required in rule (2), above, first to properties with unrealized appreciation to the extent of the unrealized appreciation. Hand r block free file If the basis increase is less than the total unrealized appreciation, allocate it among those properties in proportion to their respective amounts of unrealized appreciation. Hand r block free file Allocate any remaining basis increase among all the properties in proportion to their respective fair market values. Hand r block free file Example. Hand r block free file Eun's basis in her partnership interest is $55,000. Hand r block free file In a distribution in liquidation of her entire interest, she receives properties A and B, neither of which is inventory or unrealized receivables. Hand r block free file Property A has an adjusted basis to the partnership of $5,000 and a fair market value of $40,000. Hand r block free file Property B has an adjusted basis to the partnership of $10,000 and a fair market value of $10,000. Hand r block free file To figure her basis in each property, Eun first assigns bases of $5,000 to property A and $10,000 to property B (their adjusted bases to the partnership). Hand r block free file This leaves a $40,000 basis increase (the $55,000 allocable basis minus the $15,000 total of the assigned bases). Hand r block free file She first allocates $35,000 to property A (its unrealized appreciation). Hand r block free file The remaining $5,000 is allocated between the properties based on their fair market values. Hand r block free file $4,000 ($40,000/$50,000) is allocated to property A and $1,000 ($10,000/$50,000) is allocated to property B. Hand r block free file Eun's basis in property A is $44,000 ($5,000 + $35,000 + $4,000) and her basis in property B is $11,000 ($10,000 + $1,000). Hand r block free file Allocating a basis decrease. Hand r block free file   Use the following rules to allocate any basis decrease required in rule (1) or rule (2), earlier. Hand r block free file Allocate the basis decrease first to items with unrealized depreciation to the extent of the unrealized depreciation. Hand r block free file If the basis decrease is less than the total unrealized depreciation, allocate it among those items in proportion to their respective amounts of unrealized depreciation. Hand r block free file Allocate any remaining basis decrease among all the items in proportion to their respective assigned basis amounts (as decreased in (1)). Hand r block free file Example. Hand r block free file Armando's basis in his partnership interest is $20,000. Hand r block free file In a distribution in liquidation of his entire interest, he receives properties C and D, neither of which is inventory or unrealized receivables. Hand r block free file Property C has an adjusted basis to the partnership of $15,000 and a fair market value of $15,000. Hand r block free file Property D has an adjusted basis to the partnership of $15,000 and a fair market value of $5,000. Hand r block free file To figure his basis in each property, Armando first assigns bases of $15,000 to property C and $15,000 to property D (their adjusted bases to the partnership). Hand r block free file This leaves a $10,000 basis decrease (the $30,000 total of the assigned bases minus the $20,000 allocable basis). Hand r block free file He allocates the entire $10,000 to property D (its unrealized depreciation). Hand r block free file Armando's basis in property C is $15,000 and his basis in property D is $5,000 ($15,000 − $10,000). Hand r block free file Distributions before August 6, 1997. Hand r block free file   For property distributed before August 6, 1997, allocate the basis using the following rules. Hand r block free file Allocate the basis first to unrealized receivables and inventory items included in the distribution to the extent of the partnership's adjusted basis in those items. Hand r block free file If the partnership's adjusted basis in those items exceeded the allocable basis, allocate the basis among the items in proportion to their adjusted bases to the partnership. Hand r block free file Allocate any remaining basis to other distributed properties in proportion to their adjusted bases to the partnership. Hand r block free file Partner's interest more than partnership basis. Hand r block free file   If the basis of a partner's interest to be divided in a complete liquidation of the partner's interest is more than the partnership's adjusted basis for the unrealized receivables and inventory items distributed, and if no other property is distributed to which the partner can apply the remaining basis, the partner has a capital loss to the extent of the remaining basis of the partnership interest. Hand r block free file Special adjustment to basis. Hand r block free file   A partner who acquired any part of his or her partnership interest in a sale or exchange or upon the death of another partner may be able to choose a special basis adjustment for property distributed by the partnership. Hand r block free file To choose the special adjustment, the partner must have received the distribution within 2 years after acquiring the partnership interest. Hand r block free file Also, the partnership must not have chosen the optional adjustment to basis when the partner acquired the partnership interest. Hand r block free file   If a partner chooses this special basis adjustment, the partner's basis for the property distributed is the same as it would have been if the partnership had chosen the optional adjustment to basis. Hand r block free file However, this assigned basis is not reduced by any depletion or depreciation that would have been allowed or allowable if the partnership had previously chosen the optional adjustment. Hand r block free file   The choice must be made with the partner's tax return for the year of the distribution if the distribution includes any property subject to depreciation, depletion, or amortization. Hand r block free file If the choice does not have to be made for the distribution year, it must be made with the return for the first year in which the basis of the distributed property is pertinent in determining the partner's income tax. Hand r block free file   A partner choosing this special basis adjustment must attach a statement to his or her tax return that the partner chooses under section 732(d) of the Internal Revenue Code to adjust the basis of property received in a distribution. Hand r block free file The statement must show the computation of the special basis adjustment for the property distributed and list the properties to which the adjustment has been allocated. Hand r block free file Example. Hand r block free file Chin Ho purchased a 25% interest in X partnership for $17,000 cash. Hand r block free file At the time of the purchase, the partnership owned inventory having a basis to the partnership of $14,000 and a fair market value of $16,000. Hand r block free file Thus, $4,000 of the $17,000 he paid was attributable to his share of inventory with a basis to the partnership of $3,500. Hand r block free file Within 2 years after acquiring his interest, Chin Ho withdrew from the partnership and for his entire interest received cash of $1,500, inventory with a basis to the partnership of $3,500, and other property with a basis of $6,000. Hand r block free file The value of the inventory received was 25% of the value of all partnership inventory. Hand r block free file (It is immaterial whether the inventory he received was on hand when he acquired his interest. Hand r block free file ) Since the partnership from which Chin Ho withdrew did not make the optional adjustment to basis, he chose to adjust the basis of the inventory received. Hand r block free file His share of the partnership's basis for the inventory is increased by $500 (25% of the $2,000 difference between the $16,000 fair market value of the inventory and its $14,000 basis to the partnership at the time he acquired his interest). Hand r block free file The adjustment applies only for purposes of determining his new basis in the inventory, and not for purposes of partnership gain or loss on disposition. Hand r block free file The total to be allocated among the properties Chin Ho received in the distribution is $15,500 ($17,000 basis of his interest − $1,500 cash received). Hand r block free file His basis in the inventory items is $4,000 ($3,500 partnership basis + $500 special adjustment). Hand r block free file The remaining $11,500 is allocated to his new basis for the other property he received. Hand r block free file Mandatory adjustment. Hand r block free file   A partner does not always have a choice of making this special adjustment to basis. Hand r block free file The special adjustment to basis must be made for a distribution of property (whether or not within 2 years after the partnership interest was acquired) if all the following conditions existed when the partner received the partnership interest. Hand r block free file The fair market value of all partnership property (other than money) was more than 110% of its adjusted basis to the partnership. Hand r block free file If there had been a liquidation of the partner's interest immediately after it was acquired, an allocation of the basis of that interest under the general rules (discussed earlier under Basis divided among properties) would have decreased the basis of property that could not be depreciated, depleted, or amortized and increased the basis of property that could be. Hand r block free file The optional basis adjustment, if it had been chosen by the partnership, would have changed the partner's basis for the property actually distributed. Hand r block free file Required statement. Hand r block free file   Generally, if a partner chooses a special basis adjustment and notifies the partnership, or if the partnership makes a distribution for which the special basis adjustment is mandatory, the partnership must provide a statement to the partner. Hand r block free file The statement must provide information necessary for the partner to compute the special basis adjustment. Hand r block free file Marketable securities. Hand r block free file   A partner's basis in marketable securities received in a partnership distribution, as determined in the preceding discussions, is increased by any gain recognized by treating the securities as money. Hand r block free file See Marketable securities treated as money under Partner's Gain or Loss, earlier. Hand r block free file The basis increase is allocated among the securities in proportion to their respective amounts of unrealized appreciation before the basis increase. Hand r block free file Transactions Between Partnership and Partners For certain transactions between a partner and his or her partnership, the partner is treated as not being a member of the partnership. Hand r block free file These transactions include the following. Hand r block free file Performing services for, or transferring property to, a partnership if: There is a related allocation and distribution to a partner, and The entire transaction, when viewed together, is properly characterized as occurring between the partnership and a partner not acting in the capacity of a partner. Hand r block free file Transferring money or other property to a partnership if: There is a related transfer of money or other property by the partnership to the contributing partner or another partner, and The transfers together are properly characterized as a sale or exchange of property. Hand r block free file Payments by accrual basis partnership to cash basis partner. Hand r block free file   A partnership that uses an accrual method of accounting cannot deduct any business expense owed to a cash basis partner until the amount is paid. Hand r block free file However, this rule does not apply to guaranteed payments made to a partner, which are generally deductible when accrued. Hand r block free file Guaranteed Payments Guaranteed payments are those made by a partnership to a partner that are determined without regard to the partnership's income. Hand r block free file A partnership treats guaranteed payments for services, or for the use of capital, as if they were made to a person who is not a partner. Hand r block free file This treatment is for purposes of determining gross income and deductible business expenses only. Hand r block free file For other tax purposes, guaranteed payments are treated as a partner's distributive share of ordinary income. Hand r block free file Guaranteed payments are not subject to income tax withholding. Hand r block free file The partnership generally deducts guaranteed payments on line 10 of Form 1065 as a business expense. Hand r block free file They are also listed on Schedules K and K-1 of the partnership return. Hand r block free file The individual partner reports guaranteed payments on Schedule E (Form 1040) as ordinary income, along with his or her distributive share of the partnership's other ordinary income. Hand r block free file Guaranteed payments made to partners for organizing the partnership or syndicating interests in the partnership are capital expenses. Hand r block free file Generally, organizational and syndication expenses are not deductible by the partnership. Hand r block free file However, a partnership can elect to deduct a portion of its organizational expenses and amortize the remaining expenses (see Business start-up and organizational costs in the Instructions for Form 1065). Hand r block free file Organizational expenses (if the election is not made) and syndication expenses paid to partners must be reported on the partners' Schedule K-1 as guaranteed payments. Hand r block free file Minimum payment. Hand r block free file   If a partner is to receive a minimum payment from the partnership, the guaranteed payment is the amount by which the minimum payment is more than the partner's distributive share of the partnership income before taking into account the guaranteed payment. Hand r block free file Example. Hand r block free file Under a partnership agreement, Divya is to receive 30% of the partnership income, but not less than $8,000. Hand r block free file The partnership has net income of $20,000. Hand r block free file Divya's share, without regard to the minimum guarantee, is $6,000 (30% × $20,000). Hand r block free file The guaranteed payment that can be deducted by the partnership is $2,000 ($8,000 − $6,000). Hand r block free file Divya's income from the partnership is $8,000, and the remaining $12,000 of partnership income will be reported by the other partners in proportion to their shares under the partnership agreement. Hand r block free file If the partnership net income had been $30,000, there would have been no guaranteed payment since her share, without regard to the guarantee, would have been greater than the guarantee. Hand r block free file Self-employed health insurance premiums. Hand r block free file   Premiums for health insurance paid by a partnership on behalf of a partner, for services as a partner, are treated as guaranteed payments. Hand r block free file The partnership can deduct the payments as a business expense, and the partner must include them in gross income. Hand r block free file However, if the partnership accounts for insurance paid for a partner as a reduction in distributions to the partner, the partnership cannot deduct the premiums. Hand r block free file   A partner who qualifies can deduct 100% of the health insurance premiums paid by the partnership on his or her behalf as an adjustment to income. Hand r block free file The partner cannot deduct the premiums for any calendar month, or part of a month, in which the partner is eligible to participate in any subsidized health plan maintained by any employer of the partner, the partner's spouse, the partner's dependents, or any children under age 27 who are not dependents. Hand r block free file For more information on the self-employed health insurance deduction, see chapter 6 in Publication 535. Hand r block free file Including payments in partner's income. Hand r block free file   Guaranteed payments are included in income in the partner's tax year in which the partnership's tax year ends. Hand r block free file Example 1. Hand r block free file Under the terms of a partnership agreement, Erica is entitled to a fixed annual payment of $10,000 without regard to the income of the partnership. Hand r block free file Her distributive share of the partnership income is 10%. Hand r block free file The partnership has $50,000 of ordinary income after deducting the guaranteed payment. Hand r block free file She must include ordinary income of $15,000 ($10,000 guaranteed payment + $5,000 ($50,000 × 10%) distributive share) on her individual income tax return for her tax year in which the partnership's tax year ends. Hand r block free file Example 2. Hand r block free file Lamont is a calendar year taxpayer who is a partner in a partnership. Hand r block free file The partnership uses a fiscal year that ended January 31, 2013. Hand r block free file Lamont received guaranteed payments from the partnership from February 1, 2012, until December 31, 2012. Hand r block free file He must include these guaranteed payments in income for 2013 and report them on his 2013 income tax return. Hand r block free file Payments resulting in loss. Hand r block free file   If guaranteed payments to a partner result in a partnership loss in which the partner shares, the partner must report the full amount of the guaranteed payments as ordinary income. Hand r block free file The partner separately takes into account his or her distributive share of the partnership loss, to the extent of the adjusted basis of the partner's partnership interest. Hand r block free file Sale or Exchange of Property Special rules apply to a sale or exchange of property between a partnership and certain persons. Hand r block free file Losses. Hand r block free file   Losses will not be allowed from a sale or exchange of property (other than an interest in the partnership) directly or indirectly between a partnership and a person whose direct or indirect interest in the capital or profits of the partnership is more than 50%. Hand r block free file   If the sale or exchange is between two partnerships in which the same persons directly or indirectly own more than 50% of the capital or profits interests in each partnership, no deduction of a loss is allowed. Hand r block free file   The basis of each partner's interest in the partnership is decreased (but not below zero) by the partner's share of the disallowed loss. Hand r block free file   If the purchaser later sells the property, only the gain realized that is greater than the loss not allowed will be taxable. Hand r block free file If any gain from the sale of the property is not recognized because of this rule, the basis of each partner's interest in the partnership is increased by the partner's share of that gain. Hand r block free file Gains. Hand r block free file   Gains are treated as ordinary income in a sale or exchange of property directly or indirectly between a person and a partnership, or between two partnerships, if both of the following tests are met. Hand r block free file More than 50% of the capital or profits interest in the partnership(s) is directly or indirectly owned by the same person(s). Hand r block free file The property in the hands of the transferee immediately after the transfer is not a capital asset. Hand r block free file Property that is not a capital asset includes accounts receivable, inventory, stock-in-trade, and depreciable or real property used in a trade or business. Hand r block free file More than 50% ownership. Hand r block free file   To determine if there is more than 50% ownership in partnership capital or profits, the following rules apply. Hand r block free file An interest directly or indirectly owned by, or for, a corporation, partnership, estate, or trust is considered to be owned proportionately by, or for, its shareholders, partners, or beneficiaries. Hand r block free file An individual is considered to own the interest directly or indirectly owned by, or for, the individual's family. Hand r block free file For this rule, “family” includes only brothers, sisters, half-brothers, half-sisters, spouses, ancestors, and lineal descendants. Hand r block free file If a person is considered to own an interest using rule (1), that person (the “constructive owner”) is treated as if actually owning that interest when rules (1) and (2) are applied. Hand r block free file However, if a person is considered to own an interest using rule (2), that person is not treated as actually owning that interest in reapplying rule (2) to make another person the constructive owner. Hand r block free file Example. Hand r block free file Individuals A and B and Trust T are equal partners in Partnership ABT. Hand r block free file A's husband, AH, is the sole beneficiary of Trust T. Hand r block free file Trust T's partnership interest will be attributed to AH only for the purpose of further attributing the interest to A. Hand r block free file As a result, A is a more-than-50% partner. Hand r block free file This means that any deduction for losses on transactions between her and ABT will not be allowed, and gain from property that in the hands of the transferee is not a capital asset is treated as ordinary, rather than capital, gain. Hand r block free file More information. Hand r block free file   For more information on these special rules, see Sales and Exchanges Between Related Persons in chapter 2 of Publication 544. Hand r block free file Contribution of Property Usually, neither the partner nor the partnership recognizes a gain or loss when property is contributed to the partnership in exchange for a partnership interest. Hand r block free file This applies whether a partnership is being formed or is already operating. Hand r block free file The partnership's holding period for the property includes the partner's holding period. Hand r block free file The contribution of limited partnership interests in one partnership for limited partnership interests in another partnership qualifies as a tax-free contribution of property to the second partnership if the transaction is made for business purposes. Hand r block free file The exchange is not subject to the rules explained later under Disposition of Partner's Interest. Hand r block free file Disguised sales. Hand r block free file   A contribution of money or other property to the partnership followed by a distribution of different property from the partnership to the partner is treated not as a contribution and distribution, but as a sale of property, if both of the following tests are met. Hand r block free file The distribution would not have been made but for the contribution. Hand r block free file The partner's right to the distribution does not depend on the success of partnership operations. Hand r block free file   All facts and circumstances are considered in determining if the contribution and distribution are more properly characterized as a sale. Hand r block free file However, if the contribution and distribution occur within 2 years of each other, the transfers are presumed to be a sale unless the facts clearly indicate that the transfers are not a sale. Hand r block free file If the contribution and distribution occur more than 2 years apart, the transfers are presumed not to be a sale unless the facts clearly indicate that the transfers are a sale. Hand r block free file Form 8275 required. Hand r block free file   A partner must attach Form 8275, Disclosure Statement, (or other statement) to his or her return if the partner contributes property to a partnership and, within 2 years (before or after the contribution), the partnership transfers money or other consideration to the partner. Hand r block free file For exceptions to this requirement, see section 1. Hand r block free file 707-3(c)(2) of the regulations. Hand r block free file   A partnership must attach Form 8275 (or other statement) to its return if it distributes property to a partner, and, within 2 years (before or after the distribution), the partner transfers money or other consideration to the partnership. Hand r block free file   Form 8275 must include the following information. Hand r block free file A caption identifying the statement as a disclosure under section 707 of the Internal Revenue Code. Hand r block free file A description of the transferred property or money, including its value. Hand r block free file A description of any relevant facts in determining if the transfers are properly viewed as a disguised sale. Hand r block free file See section 1. Hand r block free file 707-3(b)(2) of the regulations for a description of the facts and circumstances considered in determining if the transfers are a disguised sale. Hand r block free file Contribution to partnership treated as investment company. Hand r block free file   Gain is recognized when property is contributed (in exchange for an interest in the partnership) to a partnership that would be treated as an investment company if it were incorporated. Hand r block free file   A partnership is generally treated as an investment company if over 80% of the value of its assets is held for investment and consists of certain readily marketable items. Hand r block free file These items include money, stocks and other equity interests in a corporation, and interests in regulated investment companies and real estate investment trusts. Hand r block free file For more information, see section 351(e)(1) of the Internal Revenue Code and the related regulations. Hand r block free file Whether a partnership is treated as an investment company under this test is ordinarily determined immediately after the transfer of property. Hand r block free file   This rule applies to limited partnerships and general partnerships, regardless of whether they are privately formed or publicly syndicated. Hand r block free file Contribution to foreign partnership. Hand r block free file   A domestic partnership that contributed property after August 5, 1997, to a foreign partnership in exchange for a partnership interest may have to file Form 8865 if either of the following apply. Hand r block free file Immediately after the contribution, the partnership owned, directly or indirectly, at least a 10% interest in the foreign partnership. Hand r block free file The fair market value of the property contributed to the foreign partnership, when added to other contributions of property made to the partnership during the preceding 12-month period, is greater than $100,000. Hand r block free file   The partnership may also have to file Form 8865, even if no contributions are made during the tax year, if it owns a 10% or more interest in a foreign partnership at any time during the year. Hand r block free file See the form instructions for more information. Hand r block free file Basis of contributed property. Hand r block free file   If a partner contributes property to a partnership, the partnership's basis for determining depreciation, depletion, gain, or loss for the property is the same as the partner's adjusted basis for the property when it was contributed, increased by any gain recognized by the partner at the time of contribution. Hand r block free file Allocations to account for built-in gain or loss. Hand r block free file   The fair market value of property at the time it is contributed may be different from the partner's adjusted basis. Hand r block free file The partnership must allocate among the partners any income, deduction, gain, or loss on the property in a manner that will account for the difference. Hand r block free file This rule also applies to contributions of accounts payable and other accrued but unpaid items of a cash basis partner. Hand r block free file   The partnership can use different allocation methods for different items of contributed property. Hand r block free file A single reasonable method must be consistently applied to each item, and the overall method or combination of methods must be reasonable. Hand r block free file See section 1. Hand r block free file 704-3 of the regulations for allocation methods generally considered reasonable. Hand r block free file   If the partnership sells contributed property and recognizes gain or loss, built-in gain or loss is allocated to the contributing partner. Hand r block free file If contributed property is subject to depreciation or other cost recovery, the allocation of deductions for these items takes into account built-in gain or loss on the property. Hand r block free file However, the total depreciation, depletion, gain, or loss allocated to partners cannot be more than the depreciation or depletion allowable to the partnership or the gain or loss realized by the partnership. Hand r block free file Example. Hand r block free file Areta and Sofia formed an equal partnership. Hand r block free file Areta contributed $10,000 in cash to the partnership and Sofia contributed depreciable property with a fair market value of $10,000 and an adjusted basis of $4,000. Hand r block free file The partnership's basis for depreciation is limited to the adjusted basis of the property in Sofia's hands, $4,000. Hand r block free file In effect, Areta purchased an undivided one-half interest in the depreciable property with her contribution of $10,000. Hand r block free file Assuming that the depreciation rate is 10% a year under the General Depreciation System (GDS), she would have been entitled to a depreciation deduction of $500 per year, based on her interest in the partnership, if the adjusted basis of the property equaled its fair market value when contributed. Hand r block free file To simplify this example, the depreciation deductions are determined without regard to any first-year depreciation conventions. Hand r block free file However, since the partnership is allowed only $400 per year of depreciation (10% of $4,000), no more than $400 can be allocated between the partners. Hand r block free file The entire $400 must be allocated to Areta. Hand r block free file Distribution of contributed property to another partner. Hand r block free file   If a partner contributes property to a partnership and the partnership distributes the property to another partner within 7 years of the contribution, the contributing partner must recognize gain or loss on the distribution. Hand r block free file   The recognized gain or loss is the amount the contributing partner would have recognized if the property had been sold for its fair market value when it was distributed. Hand r block free file This amount is the difference between the property's basis and its fair market value at the time of contribution. Hand r block free file The character of the gain or loss will be the same as the character of the gain or loss that would have resulted if the partnership had sold the property to the distributee partner. Hand r block free file Appropriate adjustments must be made to the adjusted basis of the contributing partner's partnership interest and to the adjusted basis of the property distributed to reflect the recognized gain or loss. Hand r block free file Disposition of certain contributed property. Hand r block free file   The following rules determine the character of the partnership's gain or loss on a disposition of certain types of contributed property. Hand r block free file Unrealized receivables. Hand r block free file If the property was an unrealized receivable in the hands of the contributing partner, any gain or loss on its disposition by the partnership is ordinary income or loss. Hand r block free file Unrealized receivables are defined later under Payments for Unrealized Receivables and Inventory Items. Hand r block free file When reading the definition, substitute “partner” for “partnership. Hand r block free file ” Inventory items. Hand r block free file If the property was an inventory item in the hands of the contributing partner, any gain or loss on its disposition by the partnership within 5 years after the contribution is ordinary income or loss. Hand r block free file Inventory items are defined later in Payments for Unrealized Receivables and Inventory Items. Hand r block free file Capital loss property. Hand r block free file If the property was a capital asset in the contributing partner's hands, any loss on its disposition by the partnership within 5 years after the contribution is a capital loss. Hand r block free file The capital loss is limited to the amount by which the partner's adjusted basis for the property exceeded the property's fair market value immediately before the contribution. Hand r block free file Substituted basis property. Hand r block free file If the disposition of any of the property listed in (1), (2), or (3) is a nonrecognition transaction, these rules apply when the recipient of the property disposes of any substituted basis property (other than certain corporate stock) resulting from the transaction. Hand r block free file Contribution of Services A partner can acquire an interest in partnership capital or profits as compensation for services performed or to be performed. Hand r block free file Capital interest. Hand r block free file   A capital interest is an interest that would give the holder a share of the proceeds if the partnership's assets were sold at fair market value and the proceeds were distributed in a complete liquidation of the partnership. Hand r block free file This determination generally is made at the time of receipt of the partnership interest. Hand r block free file The fair market value of such an interest received by a partner as compensation for services must generally be included in the partner's gross income in the first tax year in which the partner can transfer the interest or the interest is not subject to a substantial risk of forfeiture. Hand r block free file The capital interest transferred as compensation for services is subject to the rules for restricted property discussed in Publication 525 under Employee Compensation. Hand r block free file   The fair market value of an interest in partnership capital transferred to a partner as payment for services to the partnership is a guaranteed payment, discussed earlier. Hand r block free file Profits interest. Hand r block free file   A profits interest is a partnership interest other than a capital interest. Hand r block free file If a person receives a profits interest for providing services to, or for the benefit of, a partnership in a partner capacity or in anticipation of being a partner, the receipt of such an interest is not a taxable event for the partner or the partnership. Hand r block free file However, this does not apply in the following situations. Hand r block free file The profits interest relates to a substantially certain and predictable stream of income from partnership assets, such as income from high-quality debt securities or a high-quality net lease. Hand r block free file Within 2 years of receipt, the partner disposes of the profits interest. Hand r block free file The profits interest is a limited partnership interest in a publicly traded partnership. Hand r block free file   A profits interest transferred as compensation for services is not subject to the rules for restricted property that apply to capital interests. Hand r block free file Basis of Partner's Interest The basis of a partnership interest is the money plus the adjusted basis of any property the partner contributed. Hand r block free file If the partner must recognize gain as a result of the contribution, this gain is included in the basis of his or her interest. Hand r block free file Any increase in a partner's individual liabilities because of an assumption of partnership liabilities is considered a contribution of money to the partnership by the partner. Hand r block free file Interest acquired by gift, etc. Hand r block free file   If a partner acquires an interest in a partnership by gift, inheritance, or under any circumstance other than by a contribution of money or property to the partnership, the partner's basis must be determined using the basis rules described in Publication 551. Hand r block free file Adjusted Basis There is a worksheet for adjusting the basis of a partner's interest in the partnership in the Partner's Instructions for Schedule K-1 (Form 1065). Hand r block free file The basis of an interest in a partnership is increased or decreased by certain items. Hand r block free file Increases. Hand r block free file   A partner's basis is increased by the following items. Hand r block free file The partner's additional contributions to the partnership, including an increased share of, or assumption of, partnership liabilities. Hand r block free file The partner's distributive share of taxable and nontaxable partnership income. Hand r block free file The partner's distributive share of the excess of the deductions for depletion over the basis of the depletable property, unless the property is oil or gas wells whose basis has been allocated to partners. Hand r block free file Decreases. Hand r block free file   The partner's basis is decreased (but never below zero) by the following items. Hand r block free file The money (including a decreased share of partnership liabilities or an assumption of the partner's individual liabilities by the partnership) and adjusted basis of property distributed to the partner by the partnership. Hand r block free file The partner's distributive share of the partnership losses (including capital losses). Hand r block free file The partner's distributive share of nondeductible partnership expenses that are not capital expenditures. Hand r block free file This includes the partner's share of any section 179 expenses, even if the partner cannot deduct the entire amount on his or her individual income tax return. Hand r block free file 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. Hand r block free file Partner's liabilities assumed by partnership. Hand r block free file   If contributed property is subject to a debt or if a partner's liabilities are assumed by the partnership, the basis of that partner's interest is reduced (but not below zero) by the liability assumed by the other partners. Hand r block free file This partner must reduce his or her basis because the assumption of the liability is treated as a distribution of money to that partner. Hand r block free file The other partners' assumption of the liability is treated as a contribution by them of money to the partnership. Hand r block free file See Effect of Partnership Liabilities , later. Hand r block free file Example 1. Hand r block free file Ivan acquired a 20% interest in a partnership by contributing property that had an adjusted basis to him of $8,000 and a $4,000 mortgage. Hand r block free file The partnership assumed payment of the mortgage. Hand r block free file The basis of Ivan's interest is: Adjusted basis of contributed property $8,000 Minus: Part of mortgage assumed by other partners (80% × $4,000) 3,200 Basis of Ivan's partnership interest $4,800 Example 2. Hand r block free file If, in Example 1, the contributed property had a $12,000 mortgage, the basis of Ivan's partnership interest would be zero. Hand r block free file The $1,600 difference between the mortgage assumed by the other partners, $9,600 (80% × $12,000), and his basis of $8,000 would be treated as capital gain from the sale or exchange of a partnership interest. Hand r block free file However, this gain would not increase the basis of his partnership interest. Hand r block free file Book value of partner's interest. Hand r block free file   The adjusted basis of a partner's interest is determined without considering any amount shown in the partnership books as a capital, equity, or similar account. Hand r block free file Example. Hand r block free file Enzo contributes to his partnership property that has an adjusted basis of $400 and a fair market value of $1,000. Hand r block free file His partner contributes $1,000 cash. Hand r block free file While each partner has increased his capital account by $1,000, which will be re
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The Hand R Block Free File

Hand r block free file Index A Addition to property, Additions and Improvements Adjusted basis, Adjusted Basis Alternative Depreciation System (ADS) Recovery periods, Recovery Periods Under ADS Required use, Required use of ADS. Hand r block free file Amended return, Filing an Amended Return Apartment Cooperative, Cooperative apartments. Hand r block free file Rental, Which Property Class Applies Under GDS? Automobile (see Passenger automobile) B Basis Adjustments, Basis adjustment for depreciation allowed or allowable. Hand r block free file , Adjustment of partner's basis in partnership. Hand r block free file , Basis adjustment due to recapture of clean-fuel vehicle deduction or credit. Hand r block free file , Basis adjustment due to casualty loss. Hand r block free file Basis for depreciation, What Is the Basis for Depreciation? Casualty loss, Basis adjustment due to casualty loss. Hand r block free file Change in use, Property changed from personal use. Hand r block free file Cost, Cost as Basis Depreciable basis, Depreciable basis. Hand r block free file Other than cost, Other Basis Recapture of clean-fuel vehicle deduction or credit, Basis adjustment due to recapture of clean-fuel vehicle deduction or credit. Hand r block free file Term interest, Basis adjustments. Hand r block free file Unadjusted, Figuring the Unadjusted Basis of Your Property Business use of property, partial, Partial business or investment use. Hand r block free file Business-use limit, recapture of Section 179 deduction, When Must You Recapture the Deduction? Business-use requirement, listed property, What Is the Business-Use Requirement? C Car (see Passenger automobile) Carryover of section 179 deduction, Carryover of disallowed deduction. Hand r block free file Casualty loss, effect of, Basis adjustment due to casualty loss. Hand r block free file Changing accounting method, Changing Your Accounting Method Communication equipment (see Listed property) Commuting, Commuting use. Hand r block free file Computer (see Listed property) Computer software, Computer software. Hand r block free file , Off-the-shelf computer software. Hand r block free file Containers, Containers. Hand r block free file Conventions, Which Convention Applies? Cooperative apartment, Cooperative apartments. Hand r block free file Copyright, Patents and copyrights. Hand r block free file (see also Section 197 intangibles) Correcting depreciation deductions, How Do You Correct Depreciation Deductions? Cost basis, Cost as Basis D Declining balance Method, Declining Balance Method Rates, Declining balance rate. Hand r block free file Deduction limit Automobile, Do the Passenger Automobile Limits Apply? Section 179, How Much Can You Deduct? Depreciation Deduction Employee, Can Employees Claim a Deduction? Listed property, Can Employees Claim a Deduction? Determinable useful life, Property Having a Determinable Useful Life Excepted property, Excepted Property Incorrect amount deducted, How Do You Correct Depreciation Deductions? Methods, Which Depreciation Method Applies? Property lasting more than one year, Property Lasting More Than One Year Property owned, Property You Own Property used in business, Property Used in Your Business or Income-Producing Activity Recapture, Revoking an election. Hand r block free file , Recapture of Excess Depreciation Depreciation allowable, Basis adjustment for depreciation allowed or allowable. Hand r block free file Depreciation allowed, Basis adjustment for depreciation allowed or allowable. Hand r block free file Depreciation deduction Listed property, What Is the Business-Use Requirement? Determinable useful life, Property Having a Determinable Useful Life Disposition Before recovery period ends, Sale or Other Disposition Before the Recovery Period Ends General asset account property, Disposing of GAA Property Section 179 deduction, When Must You Recapture the Deduction? E Election ADS, Electing ADS. Hand r block free file , Election of ADS. Hand r block free file Declining balance (150% DB) method, 150% election. Hand r block free file Exclusion from MACRS, Election To Exclude Property From MACRS General asset account, Electing To Use a GAA Not to claim special depreciation allowance, How Can You Elect Not To Claim an Allowance? Section 179 deduction, How Do You Elect the Deduction? Straight line method, Straight line election. Hand r block free file Electric vehicle, Electric Vehicles Employee Depreciation deduction, Can Employees Claim a Deduction? How to claim depreciation, Employee. Hand r block free file Employee deduction, listed property, Can Employees Claim a Deduction? Energy property, Energy property. Hand r block free file Exchange of MACRS property, Property Acquired in a Like-kind Exchange or Involuntary Conversion F Farm Property, Depreciation Methods for Farm Property Figuring MACRS Using percentage tables, How Is the Depreciation Deduction Figured? Without using percentage tables, Figuring the Deduction Without Using the Tables Films, Films, video tapes, and recordings. Hand r block free file Free tax services, Free help with your tax return. Hand r block free file G General asset account Abusive transaction, Abusive transactions. Hand r block free file Disposing of property, Disposing of GAA Property Grouping property in, Grouping Property Nonrecognition transaction, Nonrecognition transactions. Hand r block free file General Depreciation System (GDS), recovery periods, Recovery Periods Under GDS Gift (see Basis, other than cost) H Help (see Tax help) I Idle property, Idle Property Improvements, How Do You Treat Repairs and Improvements?, Additions and Improvements Income forecast method, Income Forecast Method Incorrect depreciation deductions, How Do You Correct Depreciation Deductions? Indian reservation Defined, Indian reservation. Hand r block free file Qualified infrastructure property, Qualified infrastructure property. Hand r block free file Qualified property, Qualified property. Hand r block free file Recovery periods for qualified property, Indian Reservation Property Related person, Related person. Hand r block free file Inheritance (see Basis, other than cost) Intangible property Depreciation method, Intangible Property, Income Forecast Method Income forecast method, Income Forecast Method Straight line method, Intangible Property Inventory, Inventory. Hand r block free file Investment use of property, partial, Partial business or investment use. Hand r block free file Involuntary conversion of MACRS property, Property Acquired in a Like-kind Exchange or Involuntary Conversion L Land Not depreciable, Land Preparation costs, Land Leased property, Leased property. Hand r block free file Leasehold improvement property, defined, Qualified leasehold improvement property. Hand r block free file , Qualified leasehold improvement property. Hand r block free file Life tenant, Life tenant. Hand r block free file (see also Term interests) Limit on deduction Automobile, Do the Passenger Automobile Limits Apply? Section 179, How Much Can You Deduct? Listed property 5% owner, 5% owner. Hand r block free file Computer, Computers and Related Peripheral Equipment Condition of employment, Condition of employment. Hand r block free file Defined, What Is Listed Property? Employee deduction, Can Employees Claim a Deduction? Employer convenience, Employer's convenience. Hand r block free file Improvements to, Improvements to listed property. Hand r block free file Leased, Lessee's Inclusion Amount Passenger automobile, Passenger Automobiles Qualified business use, Qualified Business Use Recordkeeping, Adequate Records Related person, Related persons. Hand r block free file Reporting on Form 4562, How Is Listed Property Information Reported? Lodging, Property used for lodging. Hand r block free file M Maximum deduction Electric vehicles, Electric Vehicles Passenger automobiles, Maximum Depreciation Deduction Trucks, Trucks and Vans Vans, Trucks and Vans Mobile home (see Residential rental property) Modified ACRS (MACRS) Addition or improvement, Additions and Improvements Alternative Depreciation System (ADS), Which Depreciation System (GDS or ADS) Applies? Conventions, Which Convention Applies? Declining balance method, Declining Balance Method Depreciation methods, Which Depreciation Method Applies? Farm property, Depreciation Methods for Farm Property Figuring, short tax year, Property Placed in Service in a Short Tax Year General Depreciation System (GDS), Which Depreciation System (GDS or ADS) Applies? Percentage tables, Using the MACRS Percentage Tables Property classes, Which Property Class Applies Under GDS? Recovery periods, Which Recovery Period Applies? Short tax year, Figuring the Deduction for a Short Tax Year Straight line method, Straight Line Method N Nonresidential real property, Which Property Class Applies Under GDS? Nontaxable transfer of MACRS property, Property Acquired in a Nontaxable Transfer O Office in the home, Office in the home. Hand r block free file , Office in the home. Hand r block free file Ownership, incidents of, Incidents of ownership. Hand r block free file P Partial business use, Partial business use. Hand r block free file Passenger automobile Defined, Passenger Automobiles Electric vehicles, Electric Vehicles Limit on, Do the Passenger Automobile Limits Apply? Maximum depreciation deduction, Maximum Depreciation Deduction Trucks, Trucks and Vans Vans, Trucks and Vans Patent, Patents and copyrights. Hand r block free file (see also Section 197 intangibles) Personal property, Personal property. Hand r block free file Phonographic equipment (see Listed property) Photographic equipment (see Listed property) Placed in service Before 1987, Property You Placed in Service Before 1987 Date, What Is the Placed in Service Date? Rule, Placed in Service Property Classes, Which Property Class Applies Under GDS? Depreciable, What Property Can Be Depreciated? Idle, Idle Property Improvements, How Do You Treat Repairs and Improvements? Leased, Leased property. Hand r block free file , Leased property. Hand r block free file Listed, What Is Listed Property? Personal, Personal property. Hand r block free file Real, Real property. Hand r block free file Retired from service, Retired From Service Tangible personal, Tangible personal property. Hand r block free file Term interest, Certain term interests in property. Hand r block free file Q Qualified leasehold improvement property, defined, Qualified leasehold improvement property. Hand r block free file , Qualified leasehold improvement property. Hand r block free file Qualified property, special depreciation allowance, What Is Qualified Property? R Real property, Real property. Hand r block free file Recapture Clean-fuel vehicle deduction or credit, Basis adjustment due to recapture of clean-fuel vehicle deduction or credit. Hand r block free file General asset account, abusive transaction, Abusive transactions. Hand r block free file Listed property, Recapture of Excess Depreciation MACRS depreciation, Revoking an election. Hand r block free file Section 179 deduction, When Must You Recapture the Deduction? Special depreciation allowance, When Must You Recapture an Allowance? Recordkeeping Listed property, Adequate Records Section 179, How Do You Elect the Deduction? Recovery periods ADS, Recovery Periods Under ADS GDS, Recovery Periods Under GDS Related persons, Related persons. Hand r block free file , Related persons. Hand r block free file , Related persons. Hand r block free file , Related persons. Hand r block free file , Related person. Hand r block free file , Related persons. Hand r block free file Rent-to-own property, defined, Qualified rent-to-own property. Hand r block free file Rental home (see Residential rental property) Rented property, improvements, Improvements to rented property. Hand r block free file Repairs, How Do You Treat Repairs and Improvements? Residential rental property, Which Property Class Applies Under GDS? Retail motor fuels outlet, Retail motor fuels outlet. Hand r block free file Revoking ADS election, Electing ADS. Hand r block free file General asset account election, Revoking an election. Hand r block free file Section 179 election, Revoking an election. Hand r block free file S Sale of property, Sale or Other Disposition Before the Recovery Period Ends Section 179 deduction Business use required, Partial business use. Hand r block free file Carryover, Carryover of disallowed deduction. Hand r block free file Dispositions, When Must You Recapture the Deduction? Electing, How Do You Elect the Deduction? Limits Business (taxable) income, Business Income Limit Business-use, recapture, When Must You Recapture the Deduction? Dollar, Dollar Limits Enterprise zone business, Enterprise Zone Businesses Partial business use, Partial business use. Hand r block free file Married filing separate returns, Married Individuals Partnership rules, Partnerships and Partners Property Eligible, Eligible Property Excepted, Excepted Property Purchase required, Property Acquired by Purchase Recapture, When Must You Recapture the Deduction? Recordkeeping, How Do You Elect the Deduction? S corporation rules, S Corporations Settlement fees, Settlement costs. Hand r block free file Short tax year Figuring depreciation, Property Placed in Service in a Short Tax Year Figuring placed-in-service date, Using the Applicable Convention in a Short Tax Year Software, computer, Computer software. Hand r block free file , Off-the-shelf computer software. Hand r block free file Sound recording, Films, video tapes, and recordings. Hand r block free file Special depreciation allowance Election not to claim, How Can You Elect Not To Claim an Allowance? Qualified property, What Is Qualified Property? Recapture, When Must You Recapture an Allowance? Stock, constructive ownership of, Constructive ownership of stock or partnership interest. Hand r block free file Straight line method, Intangible Property, Straight Line Method Created intangibles, Certain created intangibles. Hand r block free file T Tangible personal property, Tangible personal property. Hand r block free file Term interest, Certain term interests in property. Hand r block free file Trade-in of property, Trade-in of other property. Hand r block free file Trucks, Trucks and Vans U Unadjusted basis, Figuring the Unadjusted Basis of Your Property Useful life, Property Having a Determinable Useful Life V Vans, Trucks and Vans Video tape, Films, video tapes, and recordings. Hand r block free file Video-recording equipment (see Listed property) W When to use ADS, Which Depreciation System (GDS or ADS) Applies? Worksheet Leased listed property, Inclusion amount worksheet. Hand r block free file MACRS, MACRS Worksheet Prev  Up     Home   More Online Publications