Larry Tunnell - Taxation Essentials of LLCs and Partnerships

1 Cover

2 Chapter 1: Overview: Basic Tax Structure of Partnerships and LLCs Chapter 1 Overview: Basic Tax Structure of Partnerships and LLCs Learning objectives Distinguish between the various types of partnerships and limited liability companies (LLCs). Identify the effects of investor contributions and distributions on their basis in a partnership or LLC interest. Determine how partnerships and LLCs opting to be treated as partnerships report their federal taxable income to the IRS and to investors. Identify considerations related to the application of the check-the-box rules when electing to treat an entity as a partnership, LLC, or corporation. Compute the tax consequences of converting from a corportion to an LLC (or partnership); Recognize when pass-through income from a partnership or LLC is subject to the self-employment tax. What is a partnership for federal income tax purposes? 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, the partnership can be structured in such a way that some partners participate actively in partnership operations while others 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 (for example, limited partners), providing the best of both worlds: ( a ) highly flexible arrangements for sharing in the risks and rewards of business activities and ( b ) limited liability for members. Moreover, unlike corporations, partnership income is subject only 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 versus other entities Partnerships versus 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. Therefore, 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 deal with only one attorney, is 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 that the partnership's assets are insufficient to satisfy the claim. Electing to be taxed as a partnership: The “check-the-box” rules Overview of the basic framework of partnership taxation Partnership operations Notes

3 Chapter 2: Tax Consequences of Partnership or LLC Formation Determination of basis Effect of entity operations Effect of liabilities Partnership interests obtained for services Transfer of a capital interest Transfer of a profits interest Lessons for tax advisers Notes

4 Chapter 3: Partnership Distributions Introduction Liquidating distributions: Proportionate Sale of distributed property Section 736: Death or retirement of a partner from professional services partnerships or LLCs Notes

5 Chapter 4: Compensatory Payments to Partners Introduction Self‐employment income of partners Proposed regulations concerning limited partners' self‐employment income Notes

6 Chapter 5: At‐Risk and Passive Activity Limits Overview Basis and at‐risk limitations Gross income from passive activities Passive activity deductions Who is subject to the passive loss limitations? What are passive activities? Rules of application Grouping activities Notes

7 Chapter 6: Overview of Profit and Loss Allocations: General Rules and Restrictions Introduction Section 704(b): Allocations must have “substantial economic effect” Allocations with respect to contributed property: Section 704(c)(1)(A) Notes

8 Chapter 7: Reporting Taxable Income for Partnerships and LLCs Overview: Partnership tax return General tax payment and reporting scheme Form 1065: Income Form 1065: Expenses Schedules K and K‐1 Interpreting Schedule K‐1 Notes

9 Appendix A: SAMPLE PARTNERSHIP TAX RETURNFacts and financial data

10 Tax Glossary

11 Index

12 SolutionsChapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7

13 End User License Agreement

1 Cover

2 Table of Contents

3 Begin Reading

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2 ii

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