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State Taxes Online For Free

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State taxes online for free Publication 17 - Introductory Material Table of Contents What's New Reminders IntroductionIcons. State taxes online for free Ordering forms and publications. State taxes online for free Tax questions. State taxes online for free All material in this publication may be reprinted freely. State taxes online for free A citation to Your Federal Income Tax (2013) would be appropriate. State taxes online for free The explanations and examples in this publication reflect the interpretation by the Internal Revenue Service (IRS) of: Tax laws enacted by Congress, Treasury regulations, and Court decisions. State taxes online for free However, the information given does not cover every situation and is not intended to replace the law or change its meaning. State taxes online for free This publication covers some subjects on which a court may have made a decision more favorable to taxpayers than the interpretation by the IRS. State taxes online for free Until these differing interpretations are resolved by higher court decisions or in some other way, this publication will continue to present the interpretations by the IRS. State taxes online for free All taxpayers have important rights when working with the IRS. State taxes online for free These rights are described in Your Rights as a Taxpayer in the back of this publication. State taxes online for free What's New This section summarizes important tax changes that took effect in 2013. State taxes online for free Most of these changes are discussed in more detail throughout this publication. State taxes online for free Future developments. State taxes online for free  For the latest information about the tax law topics covered in this publication, including information about any tax legislation, go to www. State taxes online for free irs. State taxes online for free gov/pub17. State taxes online for free Additional Medicare Tax. State taxes online for free  Beginning in 2013, a 0. State taxes online for free 9% Additional Medicare Tax applies to Medicare wages, railroad retirement (RRTA) compensation, and self-employment income that are more than: $125,000 if married filing separately, $250,000 if married filing jointly, or $200,000 for any other filing status. State taxes online for free See Form 8959 and its instructions. State taxes online for free Net Investment Income Tax. State taxes online for free  Beginning in 2013, you may be subject to Net Investment Income Tax (NIIT). State taxes online for free The NIIT is 3. State taxes online for free 8% of the smaller of (a) your net investment income or (b) the excess of your modified adjusted gross income over: $125,000 if married filing separately, $250,000 if married filing jointly or qualifying widow(er), or $200,000 if any other filing status. State taxes online for free See Form 8960 and its instructions. State taxes online for free Change in tax rates. State taxes online for free  The highest tax rate is 39. State taxes online for free 6%. State taxes online for free For more information, see the 2013 Tax Computation Worksheet or the 2013 Tax Rate Schedules near the end of this publication. State taxes online for free Tax rate on net capital gain and qualified dividends. State taxes online for free  The maximum tax rate of 15% on net capital gain and qualified dividends has increased to 20% for some taxpayers. State taxes online for free See chapter 16. State taxes online for free Medical and dental expenses. State taxes online for free  You can deduct only the part of your medical and dental expenses that is more than 10% of your adjusted gross income (7. State taxes online for free 5% if either you or your spouse is age 65 or older). State taxes online for free See chapter 21. State taxes online for free Personal exemption amount increased for certain taxpayers. State taxes online for free  Your personal exemption is increased to $3,900. State taxes online for free But the amount is reduced if your adjusted gross income is more than: $150,000 if married filing separately, $250,000 if single, $275,000 if head of household, or $300,000 if any other filing status. State taxes online for free See chapter 3. State taxes online for free Limit on itemized deductions. State taxes online for free  You may not be able to deduct all of your itemized deductions if your adjusted gross income is more than: $150,000 if married filing separately, $250,000 if single, $275,000 if head of household, or $300,000 if any other filing status. State taxes online for free See chapter 29. State taxes online for free Same-sex marriages. State taxes online for free  If you have a same-sex spouse whom you legally married in a state (or foreign country) that recognizes same-sex marriage, you and your spouse generally must use the married filing jointly or married filing separately filing status on your 2013 return, even if you and your spouse now live in a state (or foreign country) that does not recognize same-sex marriage. State taxes online for free See chapter 2. State taxes online for free If you meet certain requirements, you may be able to file amended returns to change your filing status for some earlier years. State taxes online for free For details on filing amended returns, see chapter 1. State taxes online for free Health flexible spending arrangements (FSAs). State taxes online for free  You cannot have more than $2,500 in salary reduction contributions made to a health FSA for plan years beginning after 2012. State taxes online for free See chapter 5. State taxes online for free Expiring credits. State taxes online for free  The plug-in electric vehicle credit and the refundable part of the credit for prior year minimum tax have expired. State taxes online for free You cannot claim either one on your 2013 return. State taxes online for free See chapter 37. State taxes online for free Ponzi-type investment schemes. State taxes online for free  There are new rules for how to claim a theft loss deduction on Form 4684 due to a Ponzi-type investment scheme. State taxes online for free See chapter 25. State taxes online for free Home office deduction simplified method. State taxes online for free  If you can take a home office deduction, you may be able to use a simplified method to figure it. State taxes online for free See Publication 587. State taxes online for free Standard mileage rates. State taxes online for free  The 2013 rate for business use of your car is increased to 56½ cents a mile. State taxes online for free See chapter 26. State taxes online for free The 2013 rate for use of your car to get medical care is increased to 24 cents a mile. State taxes online for free See chapter 21. State taxes online for free The 2013 rate for use of your car to move is increased to 24 cents a mile. State taxes online for free See Publication 521, Moving Expenses. State taxes online for free Reminders Listed below are important reminders and other items that may help you file your 2013 tax return. State taxes online for free Many of these items are explained in more detail later in this publication. State taxes online for free Enter your social security number (SSN). State taxes online for free  Enter your SSN in the space provided on your tax form. State taxes online for free If you filed a joint return for 2012 and are filing a joint return for 2013 with the same spouse, enter your names and SSNs in the same order as on your 2012 return. State taxes online for free See chapter 1. State taxes online for free Secure your tax records from identity theft. State taxes online for free  Identity theft occurs when someone uses your personal information, such as your name, SSN, or other identifying information, without your permission, to commit fraud or other crimes. State taxes online for free An identity thief may use your SSN to get a job or may file a tax return using your SSN to receive a refund. State taxes online for free For more information about identity theft and how to reduce your risk from it, see chapter 1. State taxes online for free Taxpayer identification numbers. State taxes online for free  You must provide the taxpayer identification number for each person for whom you claim certain tax benefits. State taxes online for free This applies even if the person was born in 2013. State taxes online for free Generally, this number is the person's social security number (SSN). State taxes online for free See chapter 1. State taxes online for free Foreign source income. State taxes online for free  If you are a U. State taxes online for free S. State taxes online for free citizen with income from sources outside the United States (foreign income), you must report all such income on your tax return unless it is exempt by U. State taxes online for free S. State taxes online for free law. State taxes online for free This is true whether you live inside or outside the United States and whether or not you receive a Form W-2 or Form 1099 from the foreign payer. State taxes online for free This applies to earned income (such as wages and tips) as well as unearned income (such as interest, dividends, capital gains, pensions, rents and royalties). State taxes online for free If you live outside the United States, you may be able to exclude part or all of your foreign source earned income. State taxes online for free For details, see Publication 54, Tax Guide for U. State taxes online for free S. State taxes online for free Citizens and Resident Aliens Abroad. State taxes online for free Foreign financial assets. State taxes online for free  If you had foreign financial assets in 2013, you may have to file Form 8938 with your return. State taxes online for free Check www. State taxes online for free IRS. State taxes online for free gov/form8938 for details. State taxes online for free Automatic 6-month extension to file tax return. State taxes online for free  You can use Form 4868, Application for Automatic Extension of Time To File U. State taxes online for free S. State taxes online for free Individual Income Tax Return, to obtain an automatic 6-month extension of time to file your tax return. State taxes online for free See chapter 1. State taxes online for free Include your phone number on your return. State taxes online for free  To promptly resolve any questions we have in processing your tax return, we would like to be able to call you. State taxes online for free Please enter your daytime telephone number on your tax form next to your signature and occupation. State taxes online for free If you are filing a joint return, you can enter either your or your spouse's daytime phone number. State taxes online for free Payment of taxes. State taxes online for free   You can pay your taxes online, by phone, or by check or money order. State taxes online for free You can make a direct transfer from your bank account or use a credit or debit card. State taxes online for free If you e-file, you can schedule an electronic payment. State taxes online for free See chapter 1. State taxes online for free Faster ways to file your return. State taxes online for free  The IRS offers fast, accurate ways to file your tax return information without filing a paper tax return. State taxes online for free You can use IRS e-file (electronic filing). State taxes online for free See chapter 1. State taxes online for free Free electronic filing. State taxes online for free  You may be able to file your 2013 taxes online for free. State taxes online for free See chapter 1. State taxes online for free Change of address. State taxes online for free  If you change your address, you should notify the IRS. State taxes online for free See Change of Address in chapter 1. State taxes online for free Refund on a late filed return. State taxes online for free  If you were due a refund but you did not file a return, you generally must file your return within 3 years from the date the return was due (including extensions) to get that refund. State taxes online for free See chapter 1. State taxes online for free Frivolous tax returns. State taxes online for free  The IRS has published a list of positions that are identified as frivolous. State taxes online for free The penalty for filing a frivolous tax return is $5,000. State taxes online for free See chapter 1. State taxes online for free Filing erroneous claim for refund or credit. State taxes online for free  You may have to pay a penalty if you file an erroneous claim for refund or credit. State taxes online for free See chapter 1. State taxes online for free Privacy Act and paperwork reduction information. State taxes online for free   The IRS Restructuring and Reform Act of 1998, the Privacy Act of 1974, and the Paperwork Reduction Act of 1980 require that when we ask you for information we must first tell you what our legal right is to ask for the information, why we are asking for it, how it will be used, what could happen if we do not receive it, and whether your response is voluntary, required to obtain a benefit, or mandatory under the law. State taxes online for free A complete statement on this subject can be found in your tax form instructions. State taxes online for free Customer service for taxpayers. State taxes online for free  You can set up a personal appointment at the most convenient Taxpayer Assistance Center, on the most convenient business day. State taxes online for free See How To Get Tax Help in the back of this publication. State taxes online for free Preparer e-file mandate. State taxes online for free  Most paid preparers must e-file returns they prepare and file. State taxes online for free Your preparer may make you aware of this requirement and the options available to you. State taxes online for free Treasury Inspector General for Tax Administration. State taxes online for free   If you want to confidentially report misconduct, waste, fraud, or abuse by an IRS employee, you can call 1-800-366-4484 (call 1-800-877-8339 if you are deaf, hard of hearing, or have a speech disability, and are using TTY/TDD equipment). State taxes online for free You can remain anonymous. State taxes online for free Photographs of missing children. State taxes online for free  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. State taxes online for free Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. State taxes online for free You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. State taxes online for free Introduction This publication covers the general rules for filing a federal income tax return. State taxes online for free It supplements the information contained in your tax form instructions. State taxes online for free It explains the tax law to make sure you pay only the tax you owe and no more. State taxes online for free How this publication is arranged. State taxes online for free   This publication closely follows Form 1040, U. State taxes online for free S. State taxes online for free Individual Income Tax Return. State taxes online for free It is divided into six parts which cover different sections of Form 1040. State taxes online for free Each part is further divided into chapters which generally discuss one line of the form. State taxes online for free Do not worry if you file Form 1040A or Form 1040EZ. State taxes online for free Anything included on a line of either of these forms is also included on Form 1040. State taxes online for free   The table of contents inside the front cover and the index in the back of the publication are useful tools to help you find the information you need. State taxes online for free What is in this publication. State taxes online for free   The publication begins with the rules for filing a tax return. State taxes online for free It explains: Who must file a return, Which tax form to use, When the return is due, How to e-file your return, and Other general information. State taxes online for free It will help you identify which filing status you qualify for, whether you can claim any dependents, and whether the income you receive is taxable. State taxes online for free The publication goes on to explain the standard deduction, the kinds of expenses you may be able to deduct, and the various kinds of credits you may be able to take to reduce your tax. State taxes online for free   Throughout the publication are examples showing how the tax law applies in typical situations. State taxes online for free Also throughout the publication are flowcharts and tables that present tax information in an easy-to-understand manner. State taxes online for free   Many of the subjects discussed in this publication are discussed in greater detail in other IRS publications. State taxes online for free References to those other publications are provided for your information. State taxes online for free Icons. State taxes online for free   Small graphic symbols, or icons, are used to draw your attention to special information. State taxes online for free See Table 1 later for an explanation of each icon used in this publication. State taxes online for free What is not covered in this publication. State taxes online for free   Some material that you may find helpful is not included in this publication but can be found in your tax form instruction booklet. State taxes online for free This includes lists of: Where to report certain items shown on information documents, and Recorded tax information topics (TeleTax). State taxes online for free   If you operate your own business or have other self-employment income, such as from babysitting or selling crafts, see the following publications for more information. State taxes online for free Publication 334, Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ). State taxes online for free Publication 535, Business Expenses. State taxes online for free Publication 587, Business Use of Your Home (Including Use by Daycare Providers). State taxes online for free Help from the IRS. State taxes online for free   There are many ways you can get help from the IRS. State taxes online for free These are explained under How To Get Tax Help in the back of this publication. State taxes online for free Comments and suggestions. State taxes online for free   We welcome your comments about this publication and your suggestions for future editions. State taxes online for free   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. State taxes online for free NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. State taxes online for free Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. State taxes online for free   You can send your comments from www. State taxes online for free irs. State taxes online for free gov/formspubs/. State taxes online for free Click on “More Information” and then on “Comment on Tax Forms and Publications”. State taxes online for free   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. State taxes online for free Ordering forms and publications. State taxes online for free   Visit www. State taxes online for free irs. State taxes online for free gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. State taxes online for free Internal Revenue Service 1201 N. State taxes online for free Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. State taxes online for free   If you have a tax question, check the information available on IRS. State taxes online for free gov or call 1-800-829-1040. State taxes online for free We cannot answer tax questions sent to either of the above addresses. State taxes online for free IRS mission. State taxes online for free   Provide America's taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all. State taxes online for free Table 1. State taxes online for free Legend of Icons Icon Explanation Items that may cause you particular problems, or an alert about pending legislation that may be enacted after this publication goes to print. State taxes online for free An Internet site or an email address. State taxes online for free An address you may need. State taxes online for free Items you should keep in your personal records. State taxes online for free Items you may need to figure or a worksheet you may need to complete and keep for your records. State taxes online for free An important phone number. State taxes online for free Helpful information you may need. State taxes online for free Prev  Up  Next   Home   More Online Publications
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Before You Buy

Being a smart consumer in a world with so many products and services can be somewhat daunting. With so many options available, it is easy to get overwhelmed with major purchase decisions- from the initial research, visiting stores to look at actual products, and then deciding which item to purchase, there are a lot of factors to consider. Fortunately, the Consumer Action Handbook is here to make the purchasing process easier and help you get the most for your money. Keep reading to learn more about this valuable resource.

Do Your Research

Before you begin your search for a new product, it is always helpful to assess your needs and what you can realistically afford. Although many companies produce or sell the item that you want, there can be a wide range of features and prices charged for what seems like a very easy purchase. Deciding what you need in advance helps to narrow the focus of your search and avoid paying for bells and whistles that you do not need.

In order to know what you should look for, you will need to do some preliminary research. There are a variety of sources of valuable information to consult during this step. Your research can be as simple as talking to trusted family and friends that have bought the same type of product recently or picking up a copy of Consumer Reports for unbiased ratings about the products. More than just the product itself, you should also be concerned about the type of customer service that the manufacturer or retailer has provided. Be sure to contact the Better Business Bureau or your local consumer affairs department to determine if any other consumers have filed a complaint against the companies you may possibly work with on your purchase.

Ready, Set, Shop

Once you have done your basic research, it’s time to start shopping. This could mean reading the sales flyers in the newspaper to get an understanding of the price ranges for the products you are looking for. If you are making a purchase that requires financing, such as a car or home, you may also want get a free copy of your credit report to see if you can qualify for a favorable interest rate.

You should now go and look at actual models in person. It may be helpful to take along the wishlist and your budget to keep you focused on your requirements for the item you choose. Keep in mind that there will be sales support on hand in the store; ask them to clarify facts, definitions, or other technical details rather than considering them as your advocate. Remain committed to your initial research and budget so you can avoid making an impulse decision or being pressured by sales staff to buy something that is more expensive than you need.

Once you have narrowed down the field to the item that you want and can afford, be sure to ask about service, return and refund policies, other fees, and the manufacturer warranties. If possible get all of the company’s policies and procedures in writing. Some companies offer extended warranties or service contracts for your purchases. Before agreeing to purchase this additional coverage, ask yourself questions such as:

  • Who manages the warranty (the manufacturer, the seller, or a third party)?
  • How is this coverage different from the manufacturer’s product warranty?
  • How are claims handled?

Drip Pricing

Have you ever planned to make a purchase, only to find out that there are additional, sometimes mandatory, fees that weren’t included in the advertised price? The total cost is not revealed until the end of the purchasing process. If so, you have been the victim of drip pricing. This practice makes it difficult for consumers to determine the full cost and compare similar options, when all the fees aren’t disclosed up front. You can protect yourself by reading the policies before completing the sale and asking questions of sales personnel. Also, if you have charged your purchase on your credit card, you may be able to dispute the extra fees if they are more than you had agreed to with the seller.

The State Taxes Online For Free

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