Whittenburg Gerald E., Altus-Buller Martha. Income Tax Fundamentals
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sold immediately, and any gain would be long-term, assuming the property is a capital asset
to the partnership.
EXAMPLE Clark contributes property to the Rose Partnership in exchange for
a partnership interest. The property contributed has an adjusted
basis to Clark of $45,000 and a fair m arket value of $75,000 on the
date of the contribution. The partnership’s basis in the property is
$45,000. N
SECTION 10.3PARTNERSHIP INCOME REPORTING
A partnership is required to report its income and other items on Form 1065, U.S. Part-
nership Return of Income, even though the partnership entity does not pay federal income
tax. The tax return is due on the fifteenth day of the fourth month following the close of
the partnership’s tax year. When reporting partnership income, certain transactions must
be separated rather than being reported as part of ordinary income. The primary items that
must be reported separately are capital gains and losses, Section 1231 gains and losses, div-
idends, interest income, casualty gains and losses, tax-exempt income, retirement contribu-
tions, charitable contributions, and most credits. These items are listed as separate income
or expenses, since they are subject to special calculations or limitations on the tax returns of
the partners.
After the special items are separated, the partnership reports the remainder of its ordi-
nary income or loss. The ordinary income or loss of a partnership is calculated in the same
manner as that of an individual, except the partnership is not allowed to deduct the stan-
dard deduction, amounts for exemptions, foreign taxes paid, charitable contributions, net
operating losses, or personal itemized deductions. Schedule K-1 of Form 1065 presents the
allocation of ordinary income or loss, special income and deductions, and gains and losses
to each partner. The partners report the amounts from their Schedule K-1s on their own
tax returns.
A partner’s deductible loss from a partnership is limited to the basis of the partner’s part-
nership interest at the end of the year in which the loss was incurred. The partner’s partner-
ship basis cannot be reduced belo w zero. An y unused losses may be carried forward and
reported in a future year when there is partnership basis available to be reduced by the loss.
Self-Study Problem 10.2
John and Linda form the J&L Partnership. John contributes cash of $36,000 for
a 40 percent interest in the partnership. Linda contributes equipment worth
$54,000 with an adjusted basis of $17,500 for a 60 percent partnership
interest.
1. What is John’s recognized gain or loss on the
contribution?
$ ____________
2. What is John’s basis in his partnership interest? $ ____________
3. What is Linda’s recognized gain or loss on the
contribution?
$ ____________
4. What is Linda’s basis in her partnership interest? $ ____________
5. What is J&L Partnership’s basis in the equipment
received from Linda?
$ ____________
Section 10.3
Partnership Income Reporting 10-5
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SECTION 10.4
CURRENT DISTRIBUTIONS AND GUARANTEED PAYMENTS
A partnership may make distributions of money or other property to the partners. A cur-
rent distribution is defined as one which does not result in the complete termination of the
partner’s interest in the partnership.
In a current distribution, no gain is recognized by the partn er receiving the distribution
unless the partner’s basis in the partnershi p has reached zero. In such a case, gain is recog-
nized only to the extent that a distribution of money exceeds the partner’s basis in his or
her partnership interest.
The distribution of money or other property reduce s the partner’s basis in his or her
partnership interest, but not below zero.
Self-Study Problem 10.3
Robert Conrad and Jan Springs are equal partners in the Malus Valley Partner -
ship. During 2010, the partnership began operations and had the following
income and expenses:
Gross income from operations $255,600
Deductions:
Salaries to employees $168,000
Rent 12,000
Payroll taxes 6,100
Depreciation 9,250
Charitable contributions (to 50-percent
organizations)
1,500
Cash withdrawals ($25,000 for each partner) 50,000
The partnership’s balance sheet is as follows:
Malus Valley Balance Sheet as of December 31, 2010
Assets:
Cash $ 27,000
Accounts receivable 10,000
Land 115,000
Building $115,000
Less: accumulated depreciation
(9,250) 105,750
Total Assets
$257,750
Liabilities and Partners’ Capital:
Accounts payable $ 29,750
Mortgage payable 187,750
Partners’ capital ($31,500 contributed,
$15,750 by each partner)
40,250
Total Liabilities and Partners’ Capital
$257,750
Complete Form 1065, page 1, and Schedules K, L, M-1, and M-2 on pages
10-7 to 10-11 for Malus Valley. Also, complete Schedule K-1 on pages 10-13
and 10-14 for Robert.
10-6 Chapter 10
Partnership Taxation
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Section 10.4
Current Distributions and Guaranteed Payments 10-7
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10-8 Chapter 10
Partnership Taxation
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Section 10.4
Current Distributions and Guaranteed Payments 10-9
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10-10 Chapter 10
Partnership Taxation
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Section 10.4
Current Distributions and Guaranteed Payments 10-11
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10-12 Chapter 10
Partnership Taxation
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Section 10.4
Current Distributions and Guaranteed Payments 10-13
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10-14 Chapter 10
Partnership Taxation
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