AC2520 Module 5: Other Tax Considerations For Corporateslab
Ac2520 Module 5 Other Tax Considerations For Corporateslab 52partner
Ac2520 Module 5 Other Tax Considerations For Corporateslab 52partner
AC2520: Module 5 Other Tax Considerations for Corporates Lab 5.2 Partnership and Taxation 1 Rick has a $50,000 basis in the RKS General Partnership on January 1 of the current year, and he owns no other investments. He has a 20% capital interest, a 30% profits interest, and a 40% loss interest in the partnership. Rick does not work in the partnership. The partnership’s only liability is a $100,000 nonrecourse debt borrowed several years ago, which remains outstanding at year-end. Rick’s share of the liability is based on his profits interest and is included in his $50,000 partnership basis.
Rick and the partnership each report on a calendar year basis. Income for the entire partnership during the current year is: Ordinary loss $440,000 Long-term capital gain 100,000 Sec. 1231 gain 150,000 Answer the following questions: 1. What is Rick’s distributive share of income, gain, and loss for the current year? 2.
What partnership income, gain, and loss should Rick report on his tax return for the current year? 3. What is Rick’s basis in his partnership interest on the first day of the next year? Submission Requirements: ï‚· Submit your response in a Microsoft Word document. ï‚· Your response should show the calculations involved. ï‚· The submission should use: o Font: Arial; 12-point o Line spacing: Double Evaluation Criteria: The lab rubric will be used to grade this assessment.
Paper For Above instruction
The case of Rick and his partnership interest presents an interesting scenario to analyze the intricacies of partnership taxation, particularly how distributive shares, basis adjustments, and liabilities influence taxable income and basis calculations. Analyzing Rick’s situation requires understanding the allocation rules for partnership income, gains, and losses, along with the rules regulating basis adjustments for liabilities and contributions during the tax year.
Distributive Share of Income, Gain, and Loss
Rick’s distributive share of partnership income and losses is determined based on his profit, capital, and loss interests, which are 30%, 20%, and 40%, respectively. The partnership reports an overall loss of $440,000, a long-term capital gain of $100,000, and a Section 1231 gain of $150,000. To allocate these, the partnership's total income items are distributed proportionally based on Rick's interests, keeping in mind the special allocations, if any, provided by the partnership agreement.
- Loss Allocation: Rick's 40% loss interest means he is responsible for 40% of the partnership’s $440,000 loss, i.e., $176,000.
- Long-term Capital Gain: Rick’s 30% profit interest allocates $30,000 (30% of $100,000) of the long-term capital gain.
- Section 1231 Gain: Similarly, he is entitled to 30% of the $150,000 Section 1231 gain, which is $45,000.
However, the actual distributive share might differ based on partnership agreements and special allocations, but in the absence of such specific instructions, proportional allocation is assumed.
Partnership Income, Gain, and Loss Reported by Rick
Rick must recognize his share of income, gain, and loss on his tax return, adjusted by his basis. His initial basis is $50,000, which includes his share of partnership liabilities. Since the partnership has nonrecourse debt of $100,000, which remains outstanding, Rick’s share of the liability is based on his profits interest, i.e., 30%. Therefore, his share of liability is $30,000, which increases his basis.
- Adjusted Basis Calculation:
- Starting basis: $50,000
- Add: Rick’s share of liabilities: $30,000
- Adjusted basis before income/loss recognition: $80,000
He then adjusts his basis for his share of the partnership’s losses and gains:
- Losses: Deduct $176,000 (his share of the loss) from basis, subject to basis limitations.
- Gains: Increase basis by $45,000 (Section 1231 gain) and $30,000 (capital gain), provided these do not exceed basis limitations.
Basis Adjustment at Year-End
At the end of the year, Rick’s basis in his partnership interest will reflect:
- Initial basis ($50,000)
- Plus his share of liabilities ($30,000)
- Less his share of losses ($176,000)
- Plus his share of gains ($45,000 + $30,000)
Calculating:
- Starting basis: $50,000
- Plus liability share: +$30,000 → $80,000
- Less losses: -$176,000 (but cannot reduce basis below zero, so basis becomes zero)
- Plus gains: +$45,000 + $30,000 = $75,000
Since basis cannot go below zero, Rick’s basis at year-end is limited to zero after subtracting losses, and gains increase basis accordingly.
Next Year’s Basis
On January 1 of the following year, the basis is carried over at zero (if the loss exceeds basis, by law basis cannot be negative). Any subsequent income, gains, or distributions will adjust this basis.
Conclusion
In summary, Rick’s distributive share includes a $176,000 loss, $45,000 Section 1231 gain, and $30,000 capital gain. His basis is initially increased by his share of liabilities but is reduced to zero after accounting for his share of losses. The final basis on the following year’s start is reset at zero, unless additional contributions or income occur.
References
- IRS Publication 541. Partnerships.
- Internal Revenue Code §704. Income, Gains, Losses, and Deductions.
- Internal Revenue Code §704(b). Special Allocations.
- IRS Publication 544. Sales and Other Dispositions of Assets.
- Kieso, D.E., Weygandt, J.J., & Warfield, T.D. (2020). Intermediate Accounting. Wiley.
- U.S. Tax Court Cases and Treasury Regulations on Partnership Basis.
- Roberts, J. (2018). Partnership Taxation. CCH.
- Bach, S. (2021). "Understanding Partnership Profits, Losses, and Basis," Journal of Taxation.
- Mason, R. (2019). "Liability Allocations in Partnerships," Tax Adviser.
- Williams, S. (2022). "Taxation of Nonrecourse Debt in Partnerships," Accounting Today.
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