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Ezform

Ezform Index A Acknowledgment, Acknowledgment. Ezform Adoption expenses, Personal Expenses Airplanes, donations of, Cars, Boats, and Airplanes Appraisal fees, Appraisal Fees Assistance (see Tax help) Athletic events, Athletic events. Ezform B Bargain sales, Bargain Sales Blood donated, Value of Time or Services Boats, donations of, Cars, Boats, and Airplanes Boats, fair market value, Cars, boats, and airplanes. Ezform C Canadian charity, Canadian charities. Ezform Capital gain property, Capital Gain Property Car expenses, Car expenses. Ezform , Car expenses. Ezform Carryovers, Carryovers Cars, donations of, Cars, Boats, and Airplanes Cash contributions, records to keep, Cash Contributions Charity benefit events, Charity benefit events. Ezform Church deacon, Church deacon. Ezform Clothing Fair market value of, Used clothing. Ezform Conservation contribution, Special 50% Limit for Qualified Conservation Contributions Contributions from which you benefit, Contributions From Which You Benefit, Contributions From Which You Benefit Contributions of property, Contributions of Property Contributions subject to special rules Car, boat, or airplane, 1098–C, Contributions Subject to Special Rules Clothing, Contributions Subject to Special Rules Fractional interest in tangible personal property, Contributions Subject to Special Rules Future interest in tangible personal property, Contributions Subject to Special Rules Household items, Contributions Subject to Special Rules Inventory from your business, Contributions Subject to Special Rules Partial interest in property, Contributions Subject to Special Rules Patent or other intellectual property, Contributions Subject to Special Rules Property subject to a debt, Contributions Subject to Special Rules Qualified conservation contribution, Contributions Subject to Special Rules Taxidermy property, Contributions Subject to Special Rules Contributions to nonqualified organizations Foreign organizations, Contributions to Nonqualified Organizations Contributions you can deduct, Contributions You Can Deduct Conventions of a qualified organization, Conventions. Ezform D Daily allowance (per diem) from a charitable organization, Daily allowance (per diem). Ezform Deduction limits, Limits on Deductions Determining fair market value, Determining Fair Market Value Disaster relief, Reminders Donor-advised funds, Contributions to Donor-Advised Funds E Easement, Building in registered historic district. Ezform F Farmer, Qualified farmer or rancher. Ezform Food inventory, Food Inventory Foreign organizations Canadian, Canadian charities. Ezform Israeli, Israeli charities. Ezform Mexican, Mexican charities. Ezform Form 8282, Form 8282. Ezform 8283, Total deduction over $500. Ezform Foster parents, Foster parents. Ezform Free tax services, Free help with your tax return. Ezform Future interests in property, Future Interest in Tangible Personal Property H Help (see Tax help) Historic building, Building in registered historic district. Ezform Household items Fair market value of, Household items. Ezform How to report, How To Report Noncash contributions, Reporting expenses for student living with you. Ezform I Introduction, Introduction Inventory, Food Inventory Israeli charity, Israeli charities. Ezform L Legislation, influencing, Contributions From Which You Benefit Limit on itemized deductions, What's New Limits on deductions, Limits on Deductions 20% limit, 20% Limit 30% limit, 30% Limit 50% limit, 50% Limit Calculation, How To Figure Your Deduction When Limits Apply Capital gain property, Special 30% Limit for Capital Gain Property Qualified conservation contributions, Special 50% Limit for Qualified Conservation Contributions M Meals, Personal Expenses Membership fees or dues, Membership fees or dues. Ezform Mexican charity, Mexican charities. Ezform Motor vehicles, donations of, Cars, Boats, and Airplanes Motor vehicles, fair market value, Cars, boats, and airplanes. Ezform N Noncash contributions, Noncash Contributions How to report, Reporting expenses for student living with you. Ezform Records to keep, Noncash Contributions Nondeductible contributions, Contributions You Cannot Deduct O Ordinary income property, Ordinary Income Property Out-of-pocket expenses, Out-of-pocket expenses. Ezform Out-of-pocket expenses in giving services, Out-of-Pocket Expenses in Giving Services P Payroll deductions, Payroll deductions. Ezform , Payroll deductions. Ezform Penalty, valuation overstatement, Penalty Personal expenses, Personal Expenses Private foundation, 50% Limit Organizations Private nonoperating foundation, Contributions to private nonoperating foundations. Ezform , 50% Limit Organizations Private operating foundation, 50% Limit Organizations Property Bargain sales, Bargain Sales Basis, Giving Property That Has Decreased in Value Capital gain, Capital Gain Property Capital gain election, Capital gain property election. Ezform Decreased in value, Giving Property That Has Decreased in Value Future interests, Future Interest in Tangible Personal Property Increased in value, Giving Property That Has Increased in Value Inventory, Food Inventory Ordinary income, Ordinary Income Property Unrelated use, Tangible personal property put to unrelated use. Ezform Publications (see Tax help) Q Qualified charitable distributions, Qualified Charitable Distributions Qualified conservation contribution, Special 50% Limit for Qualified Conservation Contributions Qualified organizations Foreign qualified organizations Canadian, Organizations That Qualify To Receive Deductible Contributions Israeli, Organizations That Qualify To Receive Deductible Contributions Mexican, Organizations That Qualify To Receive Deductible Contributions Types, Organizations That Qualify To Receive Deductible Contributions R Raffle or bingo, Contributions From Which You Benefit Recapture No exempt use, Recapture if no exempt use. Ezform Recapture of deduction of fractional interest in tangible personal property Additional tax, Recapture of deduction. Ezform Records to keep, Records To Keep Reminders Disaster relief, Reminders Reporting, How To Report Retirement home, Contributions From Which You Benefit S Services, value of, Value of Time or Services Split-dollar insurance arrangements, Contributions From Which You Benefit Student, Mutual exchange program. Ezform Exchange program, Mutual exchange program. Ezform Living with you, Student living with you. Ezform Student living with you, Expenses Paid for Student Living With You, Reporting expenses for student living with you. Ezform T Tangible personal property Future interest in, Future Interest in Tangible Personal Property Tax help, How To Get Tax Help Time, value of, Value of Time or Services Token items, Certain membership benefits can be disregarded. Ezform Travel expenses, Travel. Ezform Travel expenses for charitable services, Deductible travel expenses. Ezform Tuition, Contributions From Which You Benefit U Underprivileged youths, Underprivileged youths selected by charity. Ezform Uniforms, Uniforms. Ezform Unrelated use, Unrelated use. Ezform V Volunteers, Out-of-Pocket Expenses in Giving Services W Whaling captain, Expenses of Whaling Captains When to deduct, When To Deduct Prev  Up     Home   More Online Publications
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Small Business Tax Workshops and Webinars

Small Business Webinars

The IRS broadcasts webinars on a variety of subjects aimed at educating small business owners on issues affecting them. Online access provides the convenience of viewing webinars whenever and wherever you choose.

Visit Webinars for Small Businesses for a list of upcoming webinars.

Small Business Tax Workshops

Small Business Taxes: The Virtual Workshop is available on online to help new small business owners understand and meet their federal tax obligations.

Small business workshops, designed to help the small business owner understand and fulfill their federal tax responsibilities, are held at various locations throughout the country. Workshops are sponsored and presented by IRS partners specializing in federal tax.

Workshop topics vary from a general overview of taxes to more specific topics such as recordkeeping and retirement plans. Although most are free, some workshops have fees paid directly to the sponsoring organization, not the IRS.

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If you live near a state line, please look for workshops in nearby cities of the bordering state.

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Page Last Reviewed or Updated: 03-Dec-2013

The Ezform

Ezform 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. Ezform 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. Ezform 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. Ezform 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. Ezform However, a joint undertaking merely to share expenses is not a partnership. Ezform For example, co-ownership of property maintained and rented or leased is not a partnership unless the co-owners provide services to the tenants. Ezform The rules you must use to determine whether an organization is classified as a partnership changed for organizations formed after 1996. Ezform Organizations formed after 1996. Ezform   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. Ezform An organization formed under a federal or state law that refers to it as incorporated or as a corporation, body corporate, or body politic. Ezform An organization formed under a state law that refers to it as a joint-stock company or joint-stock association. Ezform An insurance company. Ezform Certain banks. Ezform An organization wholly owned by a state, local, or foreign government. Ezform An organization specifically required to be taxed as a corporation by the Internal Revenue Code (for example, certain publicly traded partnerships). Ezform Certain foreign organizations identified in section 301. Ezform 7701-2(b)(8) of the regulations. Ezform A tax-exempt organization. Ezform A real estate investment trust. Ezform An organization classified as a trust under section 301. Ezform 7701-4 of the regulations or otherwise subject to special treatment under the Internal Revenue Code. Ezform Any other organization that elects to be classified as a corporation by filing Form 8832. Ezform For more information, see the instructions for Form 8832. Ezform Limited liability company. Ezform   A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC. Ezform Unlike a partnership, none of the members of an LLC are personally liable for its debts. Ezform 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. Ezform 7701-3. Ezform See Form 8832 and section 301. Ezform 7701-3 of the regulations for more details. Ezform A domestic LLC with at least two members that does not file Form 8832 is classified as a partnership for federal income tax purposes. Ezform Organizations formed before 1997. Ezform   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. Ezform Community property. Ezform    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. Ezform 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. Ezform A change in reporting position will be treated for federal tax purposes as a conversion of the entity. Ezform   A qualified entity is a business entity that meets all the following requirements. Ezform 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. Ezform No person other than one or both spouses would be considered an owner for federal tax purposes. Ezform The business entity is not treated as a corporation. Ezform   For more information about community property, see Publication 555, Community Property. Ezform Publication 555 discusses the community property laws of Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Ezform Family Partnership Members of a family can be partners. Ezform However, family members (or any other person) will be recognized as partners only if one of the following requirements is met. Ezform 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. Ezform If capital is not a material income-producing factor, they joined together in good faith to conduct a business. Ezform 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. Ezform Capital is material. Ezform   Capital is a material income-producing factor if a substantial part of the gross income of the business comes from the use of capital. Ezform Capital is ordinarily an income-producing factor if the operation of the business requires substantial inventories or investments in plants, machinery, or equipment. Ezform Capital is not material. Ezform   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. Ezform Capital interest. Ezform   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. Ezform The owner withdraws from the partnership. Ezform The partnership liquidates. Ezform   The mere right to share in earnings and profits is not a capital interest in the partnership. Ezform Gift of capital interest. Ezform   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. Ezform It must be figured by reducing the partnership income by reasonable compensation for services the donor renders to the partnership. Ezform 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. Ezform Purchase. Ezform   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. Ezform The fair market value of the purchased interest is considered donated capital. Ezform For this purpose, members of a family include only spouses, ancestors, and lineal descendants (or a trust for the primary benefit of those persons). Ezform Example. Ezform A father sold 50% of his business to his son. Ezform The resulting partnership had a profit of $60,000. Ezform Capital is a material income-producing factor. Ezform The father performed services worth $24,000, which is reasonable compensation, and the son performed no services. Ezform The $24,000 must be allocated to the father as compensation. Ezform 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. Ezform The son's share of partnership profit cannot be more than $18,000. Ezform Business owned and operated by spouses. Ezform   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. Ezform If so, they should report income or loss from the business on Form 1065. Ezform They should not report the income on a Schedule C (Form 1040) in the name of one spouse as a sole proprietor. Ezform However, the spouses can elect not to treat the joint venture as a partnership by making a Qualified Joint Venture Election. Ezform Qualified Joint Venture Election. Ezform   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. Ezform 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. Ezform   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. Ezform All items of income, gain, deduction, loss, and credit are divided between the spouses based on their respective interests in the venture. Ezform Each spouse takes into account his or her respective share of these items as a sole proprietor. Ezform Each spouse would account for his or her respective share on the appropriate form, such as Schedule C (Form 1040). Ezform 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. Ezform e. Ezform , based on their respective interests in the venture). Ezform   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. Ezform Each spouse should include his or her respective share of self-employment income on a separate Schedule SE (Form 1040), Self-Employment Tax. Ezform   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. Ezform However, this may not be true if either spouse exceeds the social security tax limitation. Ezform   For more information on qualified joint ventures, go to IRS. Ezform gov, enter “Election for Qualified Joint Ventures” in the search box and select the link reading “Election for Husband and Wife Unincorporated Businesses. Ezform ” Partnership Agreement The partnership agreement includes the original agreement and any modifications. Ezform The modifications must be agreed to by all partners or adopted in any other manner provided by the partnership agreement. Ezform The agreement or modifications can be oral or written. Ezform 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. Ezform This filing date does not include any extension of time. Ezform If the partnership agreement or any modification is silent on any matter, the provisions of local law are treated as part of the agreement. Ezform Terminating a Partnership A partnership terminates when one of the following events takes place. Ezform 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. Ezform 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. Ezform 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. Ezform See section 1. Ezform 708-1(b) of the regulations for more information on the termination of a partnership. Ezform For special rules that apply to a merger, consolidation, or division of a partnership, see sections 1. Ezform 708-1(c) and 1. Ezform 708-1(d) of the regulations. Ezform Date of termination. Ezform   The partnership's tax year ends on the date of termination. Ezform For the event described in (1), above, the date of termination is the date the partnership completes the winding up of its affairs. Ezform 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. Ezform Short period return. Ezform   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. Ezform The return is due the 15th day of the fourth month following the date of termination. Ezform See Partnership Return (Form 1065), later, for information about filing Form 1065. Ezform Conversion of partnership into limited liability company (LLC). Ezform   The conversion of a partnership into an LLC classified as a partnership for federal tax purposes does not terminate the partnership. Ezform 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. Ezform   However, the conversion may change some of the partners' bases in their partnership interests if the partnership has recourse liabilities that become nonrecourse liabilities. Ezform Because the partners share recourse and nonrecourse liabilities differently, their bases must be adjusted to reflect the new sharing ratios. Ezform If a decrease in a partner's share of liabilities exceeds the partner's basis, he or she must recognize gain on the excess. Ezform For more information, see Effect of Partnership Liabilities under Basis of Partner's Interest, later. Ezform   The same rules apply if an LLC classified as a partnership is converted into a partnership. Ezform IRS e-file (Electronic Filing) Please click here for the text description of the image. Ezform 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). Ezform Other partnerships generally have the option to file electronically. Ezform For details about IRS e-file, see the Form 1065 instructions. Ezform 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. Ezform 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. Ezform 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. Ezform 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. Ezform Investing partnership. Ezform   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. Ezform They own the property as co-owners. Ezform They reserve the right separately to take or dispose of their shares of any property acquired or retained. Ezform They do not actively conduct business or irrevocably authorize some person acting in a representative capacity to purchase, sell, or exchange the investment property. Ezform 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. Ezform Operating agreement partnership. Ezform   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. Ezform They own the property as co-owners, either in fee or under lease or other form of contract granting exclusive operating rights. Ezform They reserve the right separately to take in kind or dispose of their shares of any property produced, extracted, or used. Ezform They do not jointly sell services or the property produced or extracted. Ezform 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. Ezform 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. Ezform Electing the exclusion. Ezform   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. Ezform This filing date includes any extension of time. Ezform See Regulations section 1. Ezform 761-2(b) for the procedures to follow. Ezform 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. Ezform The partnership return must show the names and addresses of each partner and each partner's distributive share of taxable income. Ezform The return must be signed by a general partner. Ezform If a limited liability company is treated as a partnership, it must file Form 1065 and one of its members must sign the return. Ezform 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. Ezform See the Instructions for Form 1065 for more information about who must file Form 1065. Ezform Partnership Distributions Partnership distributions include the following. Ezform A withdrawal by a partner in anticipation of the current year's earnings. Ezform A distribution of the current year's or prior years' earnings not needed for working capital. Ezform A complete or partial liquidation of a partner's interest. Ezform A distribution to all partners in a complete liquidation of the partnership. Ezform A partnership distribution is not taken into account in determining the partner's distributive share of partnership income or loss. Ezform 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. Ezform 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. Ezform Effect on partner's basis. Ezform   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. Ezform See Adjusted Basis under Basis of Partner's Interest, later. Ezform Effect on partnership. Ezform   A partnership generally does not recognize any gain or loss because of distributions it makes to partners. Ezform The partnership may be able to elect to adjust the basis of its undistributed property. Ezform Certain distributions treated as a sale or exchange. Ezform   When a partnership distributes the following items, the distribution may be treated as a sale or exchange of property rather than a distribution. Ezform Unrealized receivables or substantially appreciated inventory items distributed in exchange for any part of the partner's interest in other partnership property, including money. Ezform Other property (including money) distributed in exchange for any part of a partner's interest in unrealized receivables or substantially appreciated inventory items. Ezform   See Payments for Unrealized Receivables and Inventory Items under Disposition of Partner's Interest, later. Ezform   This treatment does not apply to the following distributions. Ezform A distribution of property to the partner who contributed the property to the partnership. Ezform 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. Ezform Substantially appreciated inventory items. Ezform   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. Ezform 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. Ezform 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. Ezform Any gain recognized is generally treated as capital gain from the sale of the partnership interest on the date of the distribution. Ezform 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. Ezform For exceptions to these rules, see Distribution of partner's debt and Net precontribution gain, later. Ezform Also, see Payments for Unrealized Receivables and Inventory Items under Disposition of Partner's Interest, later. Ezform Example. Ezform The adjusted basis of Jo's partnership interest is $14,000. Ezform 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. Ezform Because the cash received does not exceed the basis of her partnership interest, Jo does not recognize any gain on the distribution. Ezform Any gain on the land will be recognized when she sells or otherwise disposes of it. Ezform The distribution decreases the adjusted basis of Jo's partnership interest to $4,000 [$14,000 − ($8,000 + $2,000)]. Ezform Marketable securities treated as money. Ezform   Generally, a marketable security distributed to a partner is treated as money in determining whether gain is recognized on the distribution. Ezform 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. Ezform   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). Ezform   For more information, including the definition of marketable securities, see section 731(c) of the Internal Revenue Code. Ezform Loss on distribution. Ezform   A partner does not recognize loss on a partnership distribution unless all the following requirements are met. Ezform The adjusted basis of the partner's interest in the partnership exceeds the distribution. Ezform The partner's entire interest in the partnership is liquidated. Ezform The distribution is in money, unrealized receivables, or inventory items. Ezform   There are exceptions to these general rules. Ezform See the following discussions. Ezform Also, see Liquidation at Partner's Retirement or Death under Disposition of Partner's Interest, later. Ezform Distribution of partner's debt. Ezform   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). Ezform   The partner is treated as having satisfied the debt for its fair market value. Ezform 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. Ezform   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. Ezform Net precontribution gain. Ezform   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. Ezform   The gain recognized is the lesser of the following amounts. Ezform 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. Ezform The “net precontribution gain” of the partner. Ezform 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. Ezform For information about the distribution of contributed property to another partner, see Contribution of Property , under Transactions Between Partnership and Partners, later. Ezform   The character of the gain is determined by reference to the character of the net precontribution gain. Ezform 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. Ezform For these rules, the term “money” includes marketable securities treated as money, as discussed earlier. Ezform Effect on basis. Ezform   The adjusted basis of the partner's interest in the partnership is increased by any net precontribution gain recognized by the partner. Ezform Other than for purposes of determining the gain, the increase is treated as occurring immediately before the distribution. Ezform See Basis of Partner's Interest , later. Ezform   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. Ezform Exceptions. Ezform   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. Ezform 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. Ezform   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. Ezform 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. Ezform 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. Ezform Example 1. Ezform The adjusted basis of Emily's partnership interest is $30,000. Ezform She receives a distribution of property that has an adjusted basis of $20,000 to the partnership and $4,000 in cash. Ezform Her basis for the property is $20,000. Ezform Example 2. Ezform The adjusted basis of Steve's partnership interest is $10,000. Ezform He receives a distribution of $4,000 cash and property that has an adjusted basis to the partnership of $8,000. Ezform His basis for the distributed property is limited to $6,000 ($10,000 − $4,000, the cash he receives). Ezform Complete liquidation of partner's interest. Ezform   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. Ezform Partner's holding period. Ezform   A partner's holding period for property distributed to the partner includes the period the property was held by the partnership. Ezform If the property was contributed to the partnership by a partner, then the period it was held by that partner is also included. Ezform Basis divided among properties. Ezform   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. Ezform For property distributed after August 5, 1997, allocate the basis using the following rules. Ezform 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. Ezform If the total of these assigned bases exceeds the allocable basis, decrease the assigned bases by the amount of the excess. Ezform 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. Ezform If the allocable basis exceeds the total of these assigned bases, increase the assigned bases by the amount of the excess. Ezform If the total of these assigned bases exceeds the allocable basis, decrease the assigned bases by the amount of the excess. Ezform Allocating a basis increase. Ezform   Allocate any basis increase required in rule (2), above, first to properties with unrealized appreciation to the extent of the unrealized appreciation. Ezform 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. Ezform Allocate any remaining basis increase among all the properties in proportion to their respective fair market values. Ezform Example. Ezform Eun's basis in her partnership interest is $55,000. Ezform In a distribution in liquidation of her entire interest, she receives properties A and B, neither of which is inventory or unrealized receivables. Ezform Property A has an adjusted basis to the partnership of $5,000 and a fair market value of $40,000. Ezform Property B has an adjusted basis to the partnership of $10,000 and a fair market value of $10,000. Ezform 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). Ezform This leaves a $40,000 basis increase (the $55,000 allocable basis minus the $15,000 total of the assigned bases). Ezform She first allocates $35,000 to property A (its unrealized appreciation). Ezform The remaining $5,000 is allocated between the properties based on their fair market values. Ezform $4,000 ($40,000/$50,000) is allocated to property A and $1,000 ($10,000/$50,000) is allocated to property B. Ezform 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). Ezform Allocating a basis decrease. Ezform   Use the following rules to allocate any basis decrease required in rule (1) or rule (2), earlier. Ezform Allocate the basis decrease first to items with unrealized depreciation to the extent of the unrealized depreciation. Ezform 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. Ezform Allocate any remaining basis decrease among all the items in proportion to their respective assigned basis amounts (as decreased in (1)). Ezform Example. Ezform Armando's basis in his partnership interest is $20,000. Ezform In a distribution in liquidation of his entire interest, he receives properties C and D, neither of which is inventory or unrealized receivables. Ezform Property C has an adjusted basis to the partnership of $15,000 and a fair market value of $15,000. Ezform Property D has an adjusted basis to the partnership of $15,000 and a fair market value of $5,000. Ezform 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). Ezform This leaves a $10,000 basis decrease (the $30,000 total of the assigned bases minus the $20,000 allocable basis). Ezform He allocates the entire $10,000 to property D (its unrealized depreciation). Ezform Armando's basis in property C is $15,000 and his basis in property D is $5,000 ($15,000 − $10,000). Ezform Distributions before August 6, 1997. Ezform   For property distributed before August 6, 1997, allocate the basis using the following rules. Ezform 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. Ezform 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. Ezform Allocate any remaining basis to other distributed properties in proportion to their adjusted bases to the partnership. Ezform Partner's interest more than partnership basis. Ezform   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. Ezform Special adjustment to basis. Ezform   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. Ezform To choose the special adjustment, the partner must have received the distribution within 2 years after acquiring the partnership interest. Ezform Also, the partnership must not have chosen the optional adjustment to basis when the partner acquired the partnership interest. Ezform   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. Ezform 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. Ezform   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. Ezform 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. Ezform   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. Ezform 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. Ezform Example. Ezform Chin Ho purchased a 25% interest in X partnership for $17,000 cash. Ezform 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. Ezform 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. Ezform 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. Ezform The value of the inventory received was 25% of the value of all partnership inventory. Ezform (It is immaterial whether the inventory he received was on hand when he acquired his interest. Ezform ) 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. Ezform 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). Ezform 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. Ezform 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). Ezform His basis in the inventory items is $4,000 ($3,500 partnership basis + $500 special adjustment). Ezform The remaining $11,500 is allocated to his new basis for the other property he received. Ezform Mandatory adjustment. Ezform   A partner does not always have a choice of making this special adjustment to basis. Ezform 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. Ezform The fair market value of all partnership property (other than money) was more than 110% of its adjusted basis to the partnership. Ezform 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. Ezform The optional basis adjustment, if it had been chosen by the partnership, would have changed the partner's basis for the property actually distributed. Ezform Required statement. Ezform   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. Ezform The statement must provide information necessary for the partner to compute the special basis adjustment. Ezform Marketable securities. Ezform   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. Ezform See Marketable securities treated as money under Partner's Gain or Loss, earlier. Ezform The basis increase is allocated among the securities in proportion to their respective amounts of unrealized appreciation before the basis increase. Ezform 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. Ezform These transactions include the following. Ezform 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. Ezform 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. Ezform Payments by accrual basis partnership to cash basis partner. Ezform   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. Ezform However, this rule does not apply to guaranteed payments made to a partner, which are generally deductible when accrued. Ezform Guaranteed Payments Guaranteed payments are those made by a partnership to a partner that are determined without regard to the partnership's income. Ezform 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. Ezform This treatment is for purposes of determining gross income and deductible business expenses only. Ezform For other tax purposes, guaranteed payments are treated as a partner's distributive share of ordinary income. Ezform Guaranteed payments are not subject to income tax withholding. Ezform The partnership generally deducts guaranteed payments on line 10 of Form 1065 as a business expense. Ezform They are also listed on Schedules K and K-1 of the partnership return. Ezform 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. Ezform Guaranteed payments made to partners for organizing the partnership or syndicating interests in the partnership are capital expenses. Ezform Generally, organizational and syndication expenses are not deductible by the partnership. Ezform 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). Ezform 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. Ezform Minimum payment. Ezform   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. Ezform Example. Ezform Under a partnership agreement, Divya is to receive 30% of the partnership income, but not less than $8,000. Ezform The partnership has net income of $20,000. Ezform Divya's share, without regard to the minimum guarantee, is $6,000 (30% × $20,000). Ezform The guaranteed payment that can be deducted by the partnership is $2,000 ($8,000 − $6,000). Ezform 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. Ezform 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. Ezform Self-employed health insurance premiums. Ezform   Premiums for health insurance paid by a partnership on behalf of a partner, for services as a partner, are treated as guaranteed payments. Ezform The partnership can deduct the payments as a business expense, and the partner must include them in gross income. Ezform 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. Ezform   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. Ezform 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. Ezform For more information on the self-employed health insurance deduction, see chapter 6 in Publication 535. Ezform Including payments in partner's income. Ezform   Guaranteed payments are included in income in the partner's tax year in which the partnership's tax year ends. Ezform Example 1. Ezform 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. Ezform Her distributive share of the partnership income is 10%. Ezform The partnership has $50,000 of ordinary income after deducting the guaranteed payment. Ezform 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. Ezform Example 2. Ezform Lamont is a calendar year taxpayer who is a partner in a partnership. Ezform The partnership uses a fiscal year that ended January 31, 2013. Ezform Lamont received guaranteed payments from the partnership from February 1, 2012, until December 31, 2012. Ezform He must include these guaranteed payments in income for 2013 and report them on his 2013 income tax return. Ezform Payments resulting in loss. Ezform   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. Ezform 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. Ezform Sale or Exchange of Property Special rules apply to a sale or exchange of property between a partnership and certain persons. Ezform Losses. Ezform   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%. Ezform   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. Ezform   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. Ezform   If the purchaser later sells the property, only the gain realized that is greater than the loss not allowed will be taxable. Ezform 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. Ezform Gains. Ezform   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. Ezform More than 50% of the capital or profits interest in the partnership(s) is directly or indirectly owned by the same person(s). Ezform The property in the hands of the transferee immediately after the transfer is not a capital asset. Ezform 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. Ezform More than 50% ownership. Ezform   To determine if there is more than 50% ownership in partnership capital or profits, the following rules apply. Ezform 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. Ezform An individual is considered to own the interest directly or indirectly owned by, or for, the individual's family. Ezform For this rule, “family” includes only brothers, sisters, half-brothers, half-sisters, spouses, ancestors, and lineal descendants. Ezform 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. Ezform 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. Ezform Example. Ezform Individuals A and B and Trust T are equal partners in Partnership ABT. Ezform A's husband, AH, is the sole beneficiary of Trust T. Ezform Trust T's partnership interest will be attributed to AH only for the purpose of further attributing the interest to A. Ezform As a result, A is a more-than-50% partner. Ezform 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. Ezform More information. Ezform   For more information on these special rules, see Sales and Exchanges Between Related Persons in chapter 2 of Publication 544. Ezform 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. Ezform This applies whether a partnership is being formed or is already operating. Ezform The partnership's holding period for the property includes the partner's holding period. Ezform 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. Ezform The exchange is not subject to the rules explained later under Disposition of Partner's Interest. Ezform Disguised sales. Ezform   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. Ezform The distribution would not have been made but for the contribution. Ezform The partner's right to the distribution does not depend on the success of partnership operations. Ezform   All facts and circumstances are considered in determining if the contribution and distribution are more properly characterized as a sale. Ezform 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. Ezform 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. Ezform Form 8275 required. Ezform   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. Ezform For exceptions to this requirement, see section 1. Ezform 707-3(c)(2) of the regulations. Ezform   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. Ezform   Form 8275 must include the following information. Ezform A caption identifying the statement as a disclosure under section 707 of the Internal Revenue Code. Ezform A description of the transferred property or money, including its value. Ezform A description of any relevant facts in determining if the transfers are properly viewed as a disguised sale. Ezform See section 1. Ezform 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. Ezform Contribution to partnership treated as investment company. Ezform   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. Ezform   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. Ezform These items include money, stocks and other equity interests in a corporation, and interests in regulated investment companies and real estate investment trusts. Ezform For more information, see section 351(e)(1) of the Internal Revenue Code and the related regulations. Ezform Whether a partnership is treated as an investment company under this test is ordinarily determined immediately after the transfer of property. Ezform   This rule applies to limited partnerships and general partnerships, regardless of whether they are privately formed or publicly syndicated. Ezform Contribution to foreign partnership. Ezform   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. Ezform Immediately after the contribution, the partnership owned, directly or indirectly, at least a 10% interest in the foreign partnership. Ezform 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. Ezform   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. Ezform See the form instructions for more information. Ezform Basis of contributed property. Ezform   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. Ezform Allocations to account for built-in gain or loss. Ezform   The fair market value of property at the time it is contributed may be different from the partner's adjusted basis. Ezform 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. Ezform This rule also applies to contributions of accounts payable and other accrued but unpaid items of a cash basis partner. Ezform   The partnership can use different allocation methods for different items of contributed property. Ezform A single reasonable method must be consistently applied to each item, and the overall method or combination of methods must be reasonable. Ezform See section 1. Ezform 704-3 of the regulations for allocation methods generally considered reasonable. Ezform   If the partnership sells contributed property and recognizes gain or loss, built-in gain or loss is allocated to the contributing partner. Ezform 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. Ezform 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. Ezform Example. Ezform Areta and Sofia formed an equal partnership. Ezform 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. Ezform The partnership's basis for depreciation is limited to the adjusted basis of the property in Sofia's hands, $4,000. Ezform In effect, Areta purchased an undivided one-half interest in the depreciable property with her contribution of $10,000. Ezform 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. Ezform To simplify this example, the depreciation deductions are determined without regard to any first-year depreciation conventions. Ezform 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. Ezform The entire $400 must be allocated to Areta. Ezform Distribution of contributed property to another partner. Ezform   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. Ezform   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. Ezform This amount is the difference between the property's basis and its fair market value at the time of contribution. Ezform 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. Ezform 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. Ezform Disposition of certain contributed property. Ezform   The following rules determine the character of the partnership's gain or loss on a disposition of certain types of contributed property. Ezform Unrealized receivables. Ezform 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. Ezform Unrealized receivables are defined later under Payments for Unrealized Receivables and Inventory Items. Ezform When reading the definition, substitute “partner” for “partnership. Ezform ” Inventory items. Ezform 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. Ezform Inventory items are defined later in Payments for Unrealized Receivables and Inventory Items. Ezform Capital loss property. Ezform 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. Ezform 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. Ezform Substituted basis property. Ezform 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. Ezform Contribution of Services A partner can acquire an interest in partnership capital or profits as compensation for services performed or to be performed. Ezform Capital interest. Ezform   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. Ezform This determination generally is made at the time of receipt of the partnership interest. Ezform 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. Ezform The capital interest transferred as compensation for services is subject to the rules for restricted property discussed in Publication 525 under Employee Compensation. Ezform   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. Ezform Profits interest. Ezform   A profits interest is a partnership interest other than a capital interest. Ezform 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. Ezform However, this does not apply in the following situations. Ezform 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. Ezform Within 2 years of receipt, the partner disposes of the profits interest. Ezform The profits interest is a limited partnership interest in a publicly traded partnership. Ezform   A profits interest transferred as compensation for services is not subject to the rules for restricted property that apply to capital interests. Ezform Basis of Partner's Interest The basis of a partnership interest is the money plus the adjusted basis of any property the partner contributed. Ezform If the partner must recognize gain as a result of the contribution, this gain is included in the basis of his or her interest. Ezform 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. Ezform Interest acquired by gift, etc. Ezform   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. Ezform 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). Ezform The basis of an interest in a partnership is increased or decreased by certain items. Ezform Increases. Ezform   A partner's basis is increased by the following items. Ezform The partner's additional contributions to the partnership, including an increased share of, or assumption of, partnership liabilities. Ezform The partner's distributive share of taxable and nontaxable partnership income. Ezform 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. Ezform Decreases. Ezform   The partner's basis is decreased (but never below zero) by the following items. Ezform 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. Ezform The partner's distributive share of the partnership losses (including capital losses). Ezform The partner's distributive share of nondeductible partnership expenses that are not capital expenditures. Ezform 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. Ezform 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. Ezform Partner's liabilities assumed by partnership. Ezform   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. Ezform This partner must reduce his or her basis because the assumption of the liability is treated as a distribution of money to that partner. Ezform The other partners' assumption of the liability is treated as a contribution by them of money to the partnership. Ezform See Effect of Partnership Liabilities , later. Ezform Example 1. Ezform 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. Ezform The partnership assumed payment of the mortgage. Ezform 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. Ezform If, in Example 1, the contributed property had a $12,000 mortgage, the basis of Ivan's partnership interest would be zero. Ezform 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. Ezform However, this gain would not increase the basis of his partnership interest. Ezform Book value of partner's interest. Ezform   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. Ezform Example. Ezform Enzo contributes to his partnership property that has an adjusted basis of $400 and a fair market value of $1,000. Ezform His partner contributes $1,000 cash. Ezform While each partner has increased his capital account by $1,000, which will be re