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Taxation Essentials of LLCs, LLPs, LPs and Other Partnerships

Author/Moderator: Robert Ricketts, Ph.D., CPA and Larry Tunnell, Ph.D.,CPA
Publisher: AICPA
Availability: In Stock
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Description

Is LLC and partnership taxation something new to you? Perhaps you have worked in this area for years but need a quick review of the fundamental concepts? If the answer is yes, this course is for you. Build a foundation of knowledge or freshen up your skills. This course addresses the tax consequences of the most common transactions engaged in by LLCs and partnerships – from formation of the entity to the reporting and allocation of partnership/LLC income or loss to distributions and compensatory payments to partners or LLC members.

Develop a level of comfort with the basic conceptual framework underlying partnership and LLC taxation, with an emphasis on explaining the tax consequences associated with issues that are most frequently confronted by tax practitioners.

Objectives: 
  • Recognize the differences between the various forms of pass-through entities
  • Determine the tax consequences, for both investors and the entity, of the most common partnership and LLC transactions
  • Understand how to handle tax-reporting issues associated with LLC and partnership operations
  • Apply the at-risk and passive activity loss limitations to pass-through losses from partnerships and LLCs
  • Distinguish between distributions and compensatory payments to partners and recognize the tax consequences of each type of payment

Prerequisite:  None

Table of Contents

  • Chapter 1 - Overview – Basic Tax Structure for Partnerships/LLCs
    • Learning Objectives
    • What Is a Partnership for Federal Income Tax Purposes?
    • Partnerships vs. Other Entities
      • Legal Protection
      • Layers of Taxation
      • Flexibility
    • Electing to be Taxed as a Partnership – The “Check-the-Box” Rules
    • Overview of the Basic Framework of Partnership Taxation
    • Partnership Operations
      • Measuring and Reporting Partnership Income
      • Effect on the Partners – Basis
      • Effect on the Partners – Rights to Partnership Assets
      • Self-employment Tax Issues
    • Questions
  • Chapter 2 - Tax Consequences of Partnership/LLC Formation
    • Learning Objectives
    • Determination of Basis
    • Effect of Entity Operations
    • Effect of Liabilities
      • General
      • Gain under Section 731 – Deemed Distributions
      • Contribution of Encumbered Property
      • Section 752(c)
    • Determination of Tax Year
      • Exceptions
    • Partnership Interests Obtained for Services
      • Section 721
      • Section 83
      • Profits vs. Capital Interest
    • Transfer of a Capital Interest
      • Effect on the Service Partner
      • Consequences for Other Partners
      • Risk of Forfeiture
    • Transfer of a Profits Interest
      • IRS “Safe Harbor”
      • Background
      • Post-Diamond Activity
    • Campbell
      • Application of Section 721
      • Relevance of Section 707
      • Employee vs. Partner
      • Importance of Valuation
    • Lessons for Tax Advisers
    • Questions
  • Chapter 3 - Partnership Distributions
    • Learning Objectives
    • Introduction
    • Current Distributions – Proportionate
      • General
      • Timing of Cash Distributions
      • Distribution of Non-cash Assets: General
      • Basis in Property Exceeds Basis in Partnership Interest
      • Distribution of Multiple Properties
    • Distributions of Encumbered Property
    • Liquidating Distributions – Proportionate
      • In General
      • Recognition of Loss
      • Series of Distributions
      • Basis in Property Received
    • Holding Period of Distributed Property
    • Sale of Distributed Property
    • Death or Retirement of a Partner from Professional Services Partnerships or LLCs – Application of Section 736
      • General Application of Section 736
      • Structuring the Transaction to Avoid Section 736
    • Questions
  • Chapter 4 - Compensatory Payments to Partners
    • Learning Objectives
    • Introduction
      • Distinguishing between Acting as a Partner vs. Acting as a Third Party
      • Payments to Partners in Their Capacity as an Independent Third Party
      • Section 707(a)(2) – Disguised Payments
      • Payments to a Partner in Their Capacity as a Partner
    • Tax Treatment of Guaranteed Payments
      • Character of Income and Deduction
      • Timing of Inclusion of a Guaranteed Payment in a Partner’s Income
      • Effect of the Guaranteed Payment on a Partner’s Basis and Capital Account
      • Guaranteed Payments and Self-Employment Income
      • Payments for Rent and Royalties
      • Capitalized Guaranteed Payments
      • Minimum Guaranteed Payments
    • Self-Employment Income of Partners
      • General Partners
      • Limited Partners
      • Community Property
    • Proposed Regulations Concerning Limited Partners’ Self-Employment Income
      • General Definition of a Limited Partner
      • Exception for Holders of More Than One Class of Interest
      • Exception for Holders of Only One Class of Interest
    • Questions
  • Chapter 5 - At-Risk and Passive Activity Limits
    • Learning Objectives
    • Overview
      • Statutory Limitations on the Deductibility of Losses
      • Disallowed Losses are Carried Forward
    • Basis and At-Risk Limitations
      • The Concept of Tax Basis as a Limit to the Deductibility of Losses
      • Accounting for Indebtedness
      • Nonrecourse Debt
      • At-Risk Rules of Section 465
    • Passive Loss Limitations
      • General
      • Passive Activity Losses
      • Passive Activity Credits
    • Gross Income from Passive Activities
      • Gain from Sale or Disposition of Property
      • Gain from Sale of an Interest in a Partnership or LLC
      • Special Rule for Substantially Appreciated Property
    • Passive Activity Deductions
    • Who Is Subject to the Passive Loss Limitations?
    • What Are Passive Activities?
      • Material Participation
      • What Constitutes Participation?
      • Rental Activities
      • Real Estate Professionals
      • Exemption for Rental Activities in which Taxpayer “Actively” Participates
      • Modified Adjusted Gross Income
    • Activities that Are Not Passive Activities
      • Re-characterization of Passive Activities as Nonpassive
    • Rules of Application
      • Installment Sales
      • Gifts
      • Dispositions by Death
    • Grouping Activities
      • Appropriate Economic Units
      • Limitations on Grouping Certain Activities
      • Consistency Is Required
    • Questions
  • Chapter 6 - Overview of Profit and Loss Allocations: General Rules and Restrictions
    • Learning Objectives
    • Introduction
    • Section 704(b): Allocations Must Have “Substantial Economic Effect”
      • General Requirements – “Economic Effect”
      • Substantiality
    • Nonrecourse Deductions
      • Overview
      • Minimum Gain Chargeback
    • Allocations with Respect to Contributed Property: Section 704(c)(1)(A)
      • Overview
      • General Rules
      • Gain or Loss on Sale of Contributed Property
      • Cost Recovery Deductions
    • Allocations in Family Partnerships: Section 704(e)
    • Questions
  • Chapter 7 - Reporting Taxable Income for Partnerships and LLCs
    • Learning Objectives
    • Overview – Partnership Tax Return
      • The Partnership Tax Return
      • Who Must File?
      • Exception – Spouses Jointly Operating a Business
      • Filing Requirements
      • Consolidated Audit Procedures
      • Accounting Methods and Other Elections
      • The Tax Matters Partner
    • General Tax Payment and Reporting Scheme
      • Payment of Tax Liability
      • Aggregated vs. Separately Stated Items: Form 1065 vs. Schedule K
      • Schedules L, M-1, M-2, and M-3
    • Form 1065 – Income
      • Gross Profit from Sales
      • Income from Other Pass-through Entities
      • Net Farm Profit (Loss)
      • Sale or Exchange of Property
      • Sale or Exchange between the Partnership or LLC and a Partner or Member
      • Other Income
    • Form 1065 – Expenses
      • Salaries and Wages
      • Payments to Partners
      • Repairs
      • Bad Debts
      • Rents
      • Taxes and Licenses
      • Interest Expense
      • Depreciation and Amortization
      • Depletion
      • Retirement Plans and Employee Benefit Programs
      • Other Deductions
    • Schedules K and K-1
      • General Scheme
      • Net Income from Form 1065 and Allocation among Partners
      • Rental Real Estate Activities
      • Other Rental Activities
      • Guaranteed Payments to Partners
      • Portfolio Income
      • Section 1231 Gain or Loss
      • Other Income (Loss)
      • Section 179 Deduction
      • Charitable Contributions
      • Investment Interest Expense
      • Section 59(e)(2) Expenditures
      • Other Deductions
      • Self-Employment Income
      • Credits
      • Adjustments and Tax Preference Items
      • Other Information
      • Classification of Schedule K Amounts
    • Interpreting Schedule K-1
      • Information Provided in Parts I and II of Schedule K-1
      • Basis
      • Amount at Risk
    • Questions
  • Chapter 8 - Ethics Focus: Taxation
    • Ethics Overview
    • Recent Developments
    • Spotlight on Independence in Tax Services
    • Key Ethical Dilemmas and Judgment Calls
    • Addressing Ethical Dilemmas
    • Available Resources
  • Chapter 9 - Latest Developments
  • Appendix A - Sample Partnership Tax Return – Form 1065, Form 8825, Schedules D, and K-1
    • Facts and Financial Data
    • Partnership Trial Balance
    • Notes to Accompany Trial Balance
    • Kachina Properties – 2007 Tax Return and Accompanying Forms and Schedules
    • Discussion of Key Figures in Return
  • Appendix B - Short Version – Partnership Return of Income Checklist 2007 – Form 1065
  • Appendix C - Limited Liability Entity (LLC, LLP, et. al.) – Addendum to the Partnership Return of Income Checklist 2007 – Form 1065

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Excerpts

Chapter 1

Overview – Basic Tax Structure for Partnerships/LLCs

Learning Objectives
After completing this chapter, you should be able to

  • Recognize the basic differences between the various types of partnerships and LLCs;
  • Understand how investors determine their interests in partnership/LLC capital and how entity operations affect those interests;
  • Understand how partnerships and LLCs opting to be treated as partnerships report their federal taxable income to the IRS and to investors;
  • Understand how investors in partnerships and LLCs report their shares of entity income and loss for tax purposes, and how those shares affect the basis of their investments in the entity.

What Is a Partnership for Federal Income Tax Purposes?
For tax purposes, a partnership exists when two or more taxpayers join together, without incorporating, to carry on business or investment activities for their mutual (or “joint”) benefit. Partnerships can be used to conduct active businesses or to carry on investment activities. Moreover, partners can choose to participate actively in partnership operations, or merely to play the role of passive investors, content to share in the profits (or losses) derived from partnership operations while playing no active role in day-to-day management activities. The primary strength of the partnership as a vehicle for conducting business is its flexibility. Partners can, for example, agree to share differently in the risks and rewards associated with partnership business activity. Yet, the partnership can still provide limited exposure to business risks for certain of its partners (e.g., limited partners), providing the best of both worlds: 1) highly flexible arrangements for sharing in the risks and rewards of business activities and 2) limited liability for members. Moreover, unlike corporations, partnership income is only subject to one layer of tax – imposed at the partner level. For these reasons, partnerships are the preferred form of organization for a wide variety of business activities.

Partnerships vs. Other Entities

Legal Protection
There are several types of partnerships, each with different levels of liability protection for their partners. The first, and most basic, type of partnership is the general partnership. In a general partnership, all partners participate in management of the partnership, and all partners have the legal authority to enter into binding legal relationships on behalf of the partnership. Thus, for example, if a law firm were organized as a general partnership, each of its partners would have the authority to enter into attorney-client relationships on behalf of the firm. Each of the firm’s clients, even if they only deal with one attorney, are represented by the partnership, rather than by an individual attorney. The downside to this arrangement is that claims against the firm, even if due to the actions of only one partner, can be enforced against any and all partners of that firm, to the extent the partnership’s assets are insufficient to satisfy the claim.

Example 1-1
In 1990, Laventhol & Horwath, then the eighth largest accounting firm in the United States, filed for bankruptcy protection under pressure from several lawsuits stemming from the failure of many of its audit clients. Like all accounting firms at the time, the firm was organized as a general partnership. The firm eventually dissolved, but its partners remained responsible for damage assessments awarded to claimants against the firm.

Most of these partners had not been personally involved in the engagements actually targeted in the various lawsuits. Nonetheless, in addition to losing their “jobs,” each of the partners was left with personal responsibility for thousands of dollars of partnership liabilities stemming from the lawsuits that drove the firm out of business. According to published reports, these liabilities generally exceeded the personal assets of most of the partners, meaning that many partners faced the prospect of personal bankruptcy following dissolution of the firm.

Due to concerns about partner liability, it can be very difficult to attract investment capital to businesses organized as general partnerships. Moreover, there are many activities in which it is neither necessary nor desirable for all partners to be involved in management of the partnership or its affairs. For example, partnerships are often used to raise capital to purchase real estate (office buildings, apartment complexes, etc.), or to drill oil and/or gas wells. These activities require large amounts of money, but do not necessarily require the input of each partner in deciding which properties to acquire or where to drill for oil and gas. Organization of the operating or drilling companies as corporations would alleviate concerns over liability and participation in management, but would raise new concerns over double taxation and lack of flexibility. Limited partnerships are designed to accommodate the business needs of these activities while still allowing them to be conducted in partnership form.

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Videocourse Details

NASBA Field of Study: Taxes
Level: Basic
Recommended CPE Credit: 17
TAXATION ESSENTIALS OF LLCS, LLPS, and OTHER TX08
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