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Tax Amendment

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Tax Amendment

Tax amendment Part Six -   Figuring Your Taxes and Credits The eight chapters in this part explain how to figure your tax and how to figure the tax of certain children who have more than $2,000 of unearned income. Tax amendment They also discuss tax credits that, unlike deductions, are subtracted directly from your tax and reduce your tax dollar for dollar. Tax amendment Chapter 36 discusses the earned income credit. Tax amendment Chapter 37 discusses a wide variety of other credits, such as the adoption credit. Tax amendment Table of Contents 30. Tax amendment   How To Figure Your TaxIntroduction Figuring Your Tax Alternative Minimum Tax (AMT) Tax Figured by IRSFiling the Return 31. Tax amendment   Tax on Unearned Income of Certain ChildrenWhat's New Introduction Useful Items - You may want to see: Which Parent's Return To UseParents Who Do Not File a Joint Return Parent's Election To Report Child's Interest and DividendsEffect of Making the Election Figuring Child's Income Figuring Additional Tax Tax for Certain Children Who Have Unearned IncomeProviding Parental Information (Form 8615, lines A–C) Step 1. Tax amendment Figuring the Child's Net Unearned Income (Form 8615, Part I) Step 2. Tax amendment Figuring Tentative Tax at the Parent's Tax Rate (Form 8615, Part II) Step 3. Tax amendment Figuring the Child's Tax (Form 8615, Part III) 32. Tax amendment   Child and Dependent Care CreditReminders Introduction Useful Items - You may want to see: Tests To Claim the CreditQualifying Person Test Earned Income Test Work-Related Expense Test Joint Return Test Provider Identification Test How To Figure the CreditFiguring Total Work-Related Expenses Earned Income Limit Dollar Limit Amount of Credit How To Claim the CreditTax credit not refundable. Tax amendment Employment Taxes for Household Employers 33. Tax amendment   Credit for the Elderly or the DisabledIntroduction Useful Items - You may want to see: Are You Eligible for the Credit?Qualified Individual Income Limits How to Claim the CreditCredit Figured for You Credit Figured by You 34. Tax amendment   Child Tax CreditIntroduction Useful Items - You may want to see: Qualifying Child Amount of CreditLimits on the Credit Claiming the Credit Additional Child Tax Credit Completing Schedule 8812 (Form 1040A or 1040)Part I Parts II–IV 35. Tax amendment   Education CreditsIntroduction Useful Items - You may want to see: Who Can Claim an Education Credit Qualified Education ExpensesNo Double Benefit Allowed Adjustments to Qualified Education Expenses 36. Tax amendment   Earned Income Credit (EIC)What's New Reminders Introduction Useful Items - You may want to see: Do You Qualify for the Credit?If Improper Claim Made in Prior Year Part A. Tax amendment Rules for EveryoneRule 1. Tax amendment Your AGI Must Be Less Than: Rule 2. Tax amendment You Must Have a Valid Social Security Number (SSN) Rule 3. Tax amendment Your Filing Status Cannot Be Married Filing Separately Rule 4. Tax amendment You Must Be a U. Tax amendment S. Tax amendment Citizen or Resident Alien All Year Rule 5. Tax amendment You Cannot File Form 2555 or Form 2555-EZ Rule 6. Tax amendment Your Investment Income Must Be $3,300 or Less Rule 7. Tax amendment You Must Have Earned Income Part B. Tax amendment Rules If You Have a Qualifying ChildRule 8. Tax amendment Your Child Must Meet the Relationship, Age, Residency, and Joint Return Tests Rule 9. Tax amendment Your Qualifying Child Cannot Be Used By More Than One Person To Claim the EIC Rule 10. Tax amendment You Cannot Be a Qualifying Child of Another Taxpayer Part C. Tax amendment Rules If You Do Not Have a Qualifying ChildRule 11. Tax amendment You Must Be at Least Age 25 but Under Age 65 Rule 12. Tax amendment You Cannot Be the Dependent of Another Person Rule 13. Tax amendment You Cannot Be a Qualifying Child of Another Taxpayer Rule 14. Tax amendment You Must Have Lived in the United States More Than Half of the Year Part D. Tax amendment Figuring and Claiming the EICRule 15. Tax amendment Your Earned Income Must Be Less Than: IRS Will Figure the EIC for You How To Figure the EIC Yourself ExamplesExample 1. Tax amendment John and Janet Smith (Form 1040A) Example 2. Tax amendment Kelly Green (Form 1040EZ) 37. Tax amendment   Other CreditsWhat's New Introduction Useful Items - You may want to see: Nonrefundable CreditsAdoption Credit Alternative Motor Vehicle Credit Alternative Fuel Vehicle Refueling Property Credit Credit to Holders of Tax Credit Bonds Foreign Tax Credit Mortgage Interest Credit Nonrefundable Credit for Prior Year Minimum Tax Plug-in Electric Drive Motor Vehicle Credit Residential Energy Credits Retirement Savings Contributions Credit (Saver's Credit) Refundable CreditsCredit for Tax on Undistributed Capital Gain Health Coverage Tax Credit Credit for Excess Social Security Tax or Railroad Retirement Tax Withheld Prev  Up  Next   Home   More Online Publications
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What's Hot

Here you'll find items of current interest — new programs, recent guidance or timely reminders.


Fuel Tax Credit Extensions: Frequently Asked Questions

These Q&As tell taxpayers how to claim the credits for qualifying sales or uses during 2012. It also describes changes to the cellulosic biofuel credit for 2013.


Legislation

In the past few years, there have been several laws passed that have tax implications. For more information, visit our pages on:


For Same-Sex Couples and Certain Domestic Partners

The following questions and answers provide information to individuals of the same sex who are lawfully married (same-sex spouses). 

Additional information may be found in: 

The following questions and answers provide information to individuals of the same sex and opposite sex who are in registered domestic partnerships, civil unions, or other similar formal relationships that are not marriages under state law. These individuals are not considered as married or spouses for federal tax purposes.

Additional information on these issues may be found in Notice 2013-61, Revenue Ruling 2013-17 and news release IR-2013-72, Treasury and IRS Announce That All Legal Same-Sex Marriages Will Be Recognized For Federal Tax Purposes; Ruling Provides Certainty, Benefits and Protections Under Federal Tax Law for Same-Sex Married Couples. 


Tax Return Preparer Requirements

The IRS has undertaken several initiatives to reach tax return preparers with education and enforcement. All paid preparers must register with the IRS and obtain a Preparer Tax Identification Number (PTIN). Find out more.


Consumer Alerts

‪Please note that the IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels.

  • ‪If you get an unsolicited email that appears to be from the IRS, please report it by sending it to phishing@irs.gov. ‪
  • If you find a suspicious website that claims to be the IRS, please send the site’s URL by email to phishing@irs.gov, using the subject line: suspicious website.

For more information on phishing scams, please see Suspicious e-Mails and Identity Theft.

March 2014
New Email Phishing Scam

The IRS has been alerted to a new email phishing scam. The emails appear to be from the IRS Taxpayer Advocate Service and include a bogus case number and the following message:

“Your reported 2013 income is flagged for review due to a document processing error. Your case has been forwarded to the Taxpayer Advocate Service for resolution assistance. To avoid delays processing your 2013 filing contact the Taxpayer Advocate Service for resolution assistance.”

The recipient is directed to click on links that supposedly provide information about the "advocate" assigned to their case or that let them "review reported income."  The links lead to web pages that solicit personal information.

Taxpayers who get these messages should not respond to the email or click on the links. Instead, they should forward the scam emails to the IRS at phishing@irs.gov. For more information, visit the IRS's Report Phishing web page.

The Taxpayer Advocate Service is a legitimate IRS organization that helps taxpayers resolve federal tax issues that have not been resolved through the normal IRS channels. The IRS, including TAS, does not initiate contact with taxpayers by email, texting or any social media.

November 2013
Typhoon Haiyan Relief Scams

Possible scams are taking place in the wake of Typhoon Haiyan. On Nov. 8, 2013, Typhoon Haiyan — known as Yolanda in the Philippines — made landfall in the central Philippines, bringing strong winds and heavy rains that have resulted in flooding, landslides, and widespread damage.

Following major disasters, it is common for scam artists to impersonate charities to get money or private information from well-intentioned taxpayers. Such fraudulent schemes may involve contact by telephone, social media, email or in-person solicitations.

October 2013
Telephone Scam Now Making the Rounds

The IRS warns consumers about a sophisticated phone scam targeting taxpayers, including recent immigrants, throughout the country. Victims are told they owe money to the IRS and it must be paid promptly through a pre-loaded debit card or wire transfer. If the victim refuses to cooperate, they are then threatened with arrest, deportation or suspension of a business or driver’s license. Characteristics of this scam include:

  • Scammers use fake names and IRS badge numbers. They generally use common names and surnames to identify themselves.
  • Scammers may be able to recite the last four digits of a victim’s Social Security Number.
  • Scammers spoof the IRS toll-free number on caller ID to make it appear that it’s the IRS calling.
  • Scammers sometimes send bogus IRS emails to some victims to support their bogus calls.
  • Victims hear background noise of other calls being conducted to mimic a call site.
  • After threatening victims with jail time or driver’s license revocation, scammers hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.

If you know you owe taxes or you think you might owe taxes, call the IRS at 1-800-829-1040. If you know you don’t owe taxes or have no reason to think that you owe any taxes (for example, you’ve never received a bill or the caller made some bogus threats as described above), call and report the incident to the Treasury Inspector General for Tax Administration at 1-800-366-4484. 

October 2012
Don't Fall for Phony IRS Websites

The IRS warns consumers about a new tax scam that uses a website that mimics the IRS e-Services online registration page.

‪The actual IRS e-Services page offers web-based products for tax preparers, not the general public. The phony web page looks almost identical to the real one.

The IRS gets many reports of fake websites like this. Criminals use these sites to lure people into providing personal and financial information that may be used to steal the victim’s money or identity. Typically, identity thieves empty the victim’s financial accounts, run up charges on the victim’s existing credit cards or apply for new loans, credit cards, services or benefits in the victim’s name.

‪The address of the official IRS website is www.irs.gov. Don’t be misled by sites claiming to be the IRS but ending in .com, .net, .org or other designations instead of .gov.

The IRS website has information that can help you protect yourself from tax scams of all kinds. Search the site using the term: phishing.


Interim Changes to the ITIN Application Process

Effective June 22, 2012, the IRS has made interim changes that affect the Individual Taxpayer Identification Number (ITIN) application process. Some of the information below, including the documentation requirements for individuals seeking an ITIN, has been superseded by these changes. Taxpayers and their representatives should review these changes, which are further explained in these Frequently Asked Questions, before requesting an ITIN.

On Oct. 2, 2012, the IRS implemented clarifying changes to its temporary procedures for issuing ITINs for noncitizens with tax Extensions and many foreign students.

Beginning Jan. 1, 2013, the IRS implemented improvements to the Individual Taxpayer Identification Number (ITIN) application process. These changes were developed based on an extensive review and feedback from a variety of stakeholders. The updated ITIN procedures build on changes announced last summer and fall to better protect the integrity of the ITIN application process and strengthen the refund process. Read about the new program changes and check out the latest frequently asked questions for more information.


Help for Victims of Ponzi Investment Schemes

If you've been the victim of a Ponzi scheme, find out more about how it affects your tax situation. We also have some new Q&As about distributions received from a trustee/receiver.


Principal Reduction Alternative Under the Home Affordable Modification Program

Find the answers to your tax questions on the Principal Reduction Alternative under the Home Affordable Modification Program (HAMP), which was established by the Departments of the Treasury and Housing and Urban Development to help distressed homeowners lower their monthly mortgage payments. The Principal Reduction Alternative does not apply to loans that are owned or guaranteed by Fannie Mae or Freddie Mac.


Tax Scams

Don't fall victim to tax scams. Remember — if it sounds too good to be true, it probably is. If you know of a tax fraud, you can report it to the IRS by sending completed Form 3949-A, Information Referral, to Internal Revenue Service, Fresno, CA 93888. Download the form or call 1-800-829-3676 to order by mail.

For recent scams, see:

  • IR-2014-16, IRS Releases the “Dirty Dozen” Tax Scams for 2014; Identity Theft, Phone Scams Lead List
  • IR-2013-33, IRS Releases the Dirty Dozen Tax Scams for 2013
  • IR-2012-23, IRS Releases the Dirty Dozen Tax Scams for 2012
  • IR-2011-73, IRS Urges Taxpayers to Avoid Becoming Victims of Tax Scam
  • IR-2011-39, Don’t Fall Prey to the 2011 Dirty Dozen Tax Scams

Education is the best way to avoid the pitfalls of these “too good to be true” tax scams. For additional information, see:


Phishing Scams

The IRS does not send taxpayers unsolicited emails about their tax accounts, tax situations or personal tax issues. If you receive such an email, most likely it's a scam.

IRS impersonation schemes flourish during filing season. These schemes may take place via phone, fax, Internet sites, social networking sites and particularly email. 

Many impersonations are identity theft scams that try to trick victims into revealing personal and financial information that can be used to access their financial accounts. Some email scams contain attachments or links that, when clicked, download malicious code (virus) that infects your computer or direct you to a bogus form or site posing as a genuine IRS form or web site. 

Some impersonations may be commercial Internet sites that consumers unknowingly visit, thinking they're accessing the genuine IRS website, www.IRS.gov. However, such sites have no connection to the IRS.

For more information on scams and what to do if you're subject to one, see: 


Tax Avoidance Transactions

Read up on the IRS's campaign against abusive tax avoidance transactions. Taxpayers with unreported income relating to offshore transactions who wish to voluntarily disclose the information to the IRS can find information on the process.


Why Pay Taxes? The Truth about Frivolous Tax Arguments

The Truth About Frivolous Tax Arguments (PDF 405K) addresses some of the more common false "legal" arguments made by individuals and groups who oppose compliance with the federal tax laws. These arguments are grouped under six general categories, with variations within each category. Each contention is briefly explained, followed by a discussion of the legal authority that rejects the contention. The second section deals with frivolous arguments encountered in collection due process cases. The final section illustrates penalties imposed on those pursuing frivolous cases.

 

Page Last Reviewed or Updated: 28-Mar-2014

The Tax Amendment

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