File your Taxes for Free!
  • Get your maximum refund*
  • 100% accurate calculations guaranteed*

TurboTax Federal Free Edition - File Taxes Online

Don't let filing your taxes get you down! We'll help make it as easy as possible. With e-file and direct deposit, there's no faster way to get your refund!

Approved TurboTax Affiliate Site. TurboTax and TurboTax Online, among others, are registered trademarks and/or service marks of Intuit Inc. in the United States and other countries. Other parties' trademarks or service marks are the property of the respective owners.


© 2012 - 2018 All rights reserved.

This is an Approved TurboTax Affiliate site. TurboTax and TurboTax Online, among other are registered trademarks and/or service marks of Intuit, Inc. in the United States and other countries. Other parties' trademarks or service marks are the property of the respective owners.
When discussing "Free e-file", note that state e-file is an additional fee. E-file fees do not apply to New York state returns. Prices are subject to change without notice. E-file and get your refund faster
*If you pay an IRS or state penalty or interest because of a TurboTax calculations error, we'll pay you the penalty and interest.
*Maximum Refund Guarantee - or Your Money Back: If you get a larger refund or smaller tax due from another tax preparation method, we'll refund the applicable TurboTax federal and/or state purchase price paid. TurboTax Federal Free Edition customers are entitled to payment of $14.99 and a refund of your state purchase price paid. Claims must be submitted within sixty (60) days of your TurboTax filing date and no later than 6/15/14. E-file, Audit Defense, Professional Review, Refund Transfer and technical support fees are excluded. This guarantee cannot be combined with the TurboTax Satisfaction (Easy) Guarantee. *We're so confident your return will be done right, we guarantee it. Accurate calculations guaranteed. If you pay an IRS or state penalty or interest because of a TurboTax calculations error, we'll pay you the penalty and interest.
https://turbotax.intuit.com/corp/guarantees.jsp

Www Hnrblock Com

Myfreetaxes Com2011 Tax Forms 1040ez2012 Irs Form 1040 EzShould College Students File TaxesFree 1040xState ReturnsTax Software For 1040nr1040x Fillable FormsTurbotax ComAmend State Tax ReturnIrs Form 1040ez FillableAmend A 2010 Tax ReturnFile 2005 Taxes FreeCan You Still E File 2010 Tax ReturnsHow To Do An Amended Return2011 Tax PrepEz Form 1040Amended Tax Return Form1040ez BookletFile Tax Extension 2011Form 1040 Federal Tax Form2010 Tax CalculatorIrs Gov Forms Form 1040xH&r Free FileFiling A Tax AmmendmentFile 2010 State Tax ReturnWww Myfreetaxes Com SandiegoWhere To Find 2011 Tax Forms2012 Ez Tax FormIrs Gov VitaFile State Taxes FreeAmmended Tax ReturnTax Software ComparisonE File State Taxes Free2012 Federal 1040 Tax FormsTax Form 20122012 Income Tax FormsHow Do You File 2011 Taxes In 2013Free 2011 Tax Software DownloadEfile 2011 Tax

Www Hnrblock Com

Www hnrblock com Internal Revenue Bulletin:  2012-14  April 2, 2012  Rev. Www hnrblock com Proc. Www hnrblock com 2012-23 Table of Contents SECTION 1. Www hnrblock com PURPOSE SECTION 2. Www hnrblock com BACKGROUND SECTION 3. Www hnrblock com SCOPE SECTION 4. Www hnrblock com APPLICATION. Www hnrblock com 01 Limitations on Depreciation Deductions for Certain Automobiles. Www hnrblock com . Www hnrblock com 02 Inclusions in Income of Lessees of Passenger Automobiles. Www hnrblock com SECTION 5. Www hnrblock com EFFECTIVE DATE SECTION 6. Www hnrblock com DRAFTING INFORMATION SECTION 1. Www hnrblock com PURPOSE This revenue procedure provides: (1) limitations on depreciation deductions for owners of passenger automobiles first placed in service by the taxpayer during calendar year 2012, including separate tables of limitations on depreciation deductions for trucks and vans; and (2) the amounts that must be included in income by lessees of passenger automobiles first leased by the taxpayer during calendar year 2012, including a separate table of inclusion amounts for lessees of trucks and vans. Www hnrblock com The tables detailing these depreciation limitations and lessee inclusion amounts reflect the automobile price inflation adjustments required by § 280F(d)(7) of the Internal Revenue Code. Www hnrblock com SECTION 2. Www hnrblock com BACKGROUND . Www hnrblock com 01 For owners of passenger automobiles, § 280F(a) imposes dollar limitations on the depreciation deduction for the year the taxpayer places the passenger automobile in service and for each succeeding year. Www hnrblock com For passenger automobiles placed in service after 1988, § 280F(d)(7) requires the Internal Revenue Service to increase the amounts allowable as depreciation deductions by a price inflation adjustment amount. Www hnrblock com The method of calculating this price inflation amount for trucks and vans placed in service in or after calendar year 2003 uses a different CPI “automobile component” (the “new trucks” component) than that used in the price inflation amount calculation for other passenger automobiles (the “new cars” component), resulting in somewhat higher depreciation deductions for trucks and vans. Www hnrblock com This change reflects the higher rate of price inflation for trucks and vans since 1988. Www hnrblock com . Www hnrblock com 02 Section 401(a) of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Pub. Www hnrblock com L. Www hnrblock com No. Www hnrblock com 111-312, 124 Stat. Www hnrblock com 3296 (Dec. Www hnrblock com 17, 2010) (the “Act”) extended the 50 percent additional first year depreciation deduction under § 168(k) to qualified property acquired by the taxpayer after December 31, 2007, and before January 1, 2013, if no written binding contract for the acquisition of the property existed before January 1, 2008, and if the taxpayer places the property in service generally before January 1, 2013. Www hnrblock com Section 168(k)(2)(F)(i) increases the first year depreciation allowed under § 280F(a)(1)(A)(i) by $8,000 for passenger automobiles to which the additional first year depreciation deduction under § 168(k) (hereinafter, referred to as “§ 168(k) additional first year depreciation deduction”) applies. Www hnrblock com . Www hnrblock com 03 Section 168(k)(2)(D)(i) provides that the § 168(k) additional first year depreciation deduction does not apply to any property required to be depreciated under the alternative depreciation system of § 168(g), including property described in § 280F(b)(1). Www hnrblock com Section 168(k)(2)(D)(iii) permits a taxpayer to elect out of the § 168(k) additional first year depreciation deduction for any class of property. Www hnrblock com Section 168(k)(4), as amended by the Act, permits a corporation to elect to increase the alternative minimum tax (“AMT”) credit limitation under § 53(c), instead of claiming the § 168(k) additional first year depreciation deduction for all eligible qualified property placed in service after December 31, 2010, that is round 2 extension property (as defined in § 168(k)(4)(I)(iv)). Www hnrblock com Accordingly, this revenue procedure provides tables for passenger automobiles for which the § 168(k) additional first year depreciation deduction applies. Www hnrblock com This revenue procedure also provides tables for passenger automobiles for which the § 168(k) additional first year depreciation deduction does not apply, either because taxpayer (1) purchased the passenger automobile used; (2) did not use the passenger automobile during 2012 more than 50 percent for business purposes; (3) elected out of the § 168(k) additional first year depreciation deduction pursuant to § 168(k)(2)(D)(iii); or (4) elected to increase the § 53 AMT credit limitation in lieu of claiming § 168(k) additional first year depreciation. Www hnrblock com . Www hnrblock com 04 Section 280F(c) requires a reduction in the deduction allowed to the lessee of a leased passenger automobile. Www hnrblock com The reduction must be substantially equivalent to the limitations on the depreciation deductions imposed on owners of passenger automobiles. Www hnrblock com Under § 1. Www hnrblock com 280F-7(a) of the Income Tax Regulations, this reduction requires a lessee to include in gross income an amount determined by applying a formula to the amount obtained from a table. Www hnrblock com One table applies to lessees of trucks and vans and another table applies to all other passenger automobiles. Www hnrblock com Each table shows inclusion amounts for a range of fair market values for each taxable year after the passenger automobile is first leased. Www hnrblock com SECTION 3. Www hnrblock com SCOPE . Www hnrblock com 01 The limitations on depreciation deductions in section 4. Www hnrblock com 01(2) of this revenue procedure apply to passenger automobiles (other than leased passenger automobiles) that are placed in service by the taxpayer in calendar year 2012, and continue to apply for each taxable year that the passenger automobile remains in service. Www hnrblock com . Www hnrblock com 02 The tables in section 4. Www hnrblock com 02 of this revenue procedure apply to leased passenger automobiles for which the lease term begins during calendar year 2012. Www hnrblock com Lessees of these passenger automobiles must use these tables to determine the inclusion amount for each taxable year during which the passenger automobile is leased. Www hnrblock com See Rev. Www hnrblock com Proc. Www hnrblock com 2007-30, 2007-1 C. Www hnrblock com B. Www hnrblock com 1104, for passenger automobiles first leased during calendar year 2007; Rev. Www hnrblock com Proc. Www hnrblock com 2008-22, 2008-1 C. Www hnrblock com B. Www hnrblock com 658, for passenger automobiles first leased during calendar year 2008; Rev. Www hnrblock com Proc. Www hnrblock com 2009-24, 2009-17 I. Www hnrblock com R. Www hnrblock com B. Www hnrblock com 885, for passenger automobiles first leased during calendar year 2009; Rev. Www hnrblock com Proc. Www hnrblock com 2010-18, 2010-9 I. Www hnrblock com R. Www hnrblock com B. Www hnrblock com 427, as amplified and modified by section 4. Www hnrblock com 03 of Rev. Www hnrblock com Proc. Www hnrblock com 2011-21, 2011-12 I. Www hnrblock com R. Www hnrblock com B. Www hnrblock com 560, for passenger automobiles first leased during calendar year 2010; and Rev. Www hnrblock com Proc. Www hnrblock com 2011-21, for passenger automobiles first leased during calendar year 2011. Www hnrblock com SECTION 4. Www hnrblock com APPLICATION . Www hnrblock com 01 Limitations on Depreciation Deductions for Certain Automobiles. Www hnrblock com (1) Amount of the inflation adjustment. Www hnrblock com (a) Passenger automobiles (other than trucks or vans). Www hnrblock com Under § 280F(d)(7)(B)(i), the automobile price inflation adjustment for any calendar year is the percentage (if any) by which the CPI automobile component for October of the preceding calendar year exceeds the CPI automobile component for October 1987. Www hnrblock com Section 280F(d)(7)(B)(ii) defines the term “CPI automobile component” as the automobile component of the Consumer Price Index for all Urban Consumers published by the Department of Labor. Www hnrblock com The new car component of the CPI was 115. Www hnrblock com 2 for October 1987 and 143. Www hnrblock com 419 for October 2011. Www hnrblock com The October 2011 index exceeded the October 1987 index by 28. Www hnrblock com 219. Www hnrblock com Therefore, the automobile price inflation adjustment for 2012 for passenger automobiles (other than trucks and vans) is 24. Www hnrblock com 5 percent (28. Www hnrblock com 219/115. Www hnrblock com 2 x 100%). Www hnrblock com The dollar limitations in § 280F(a) are multiplied by a factor of 0. Www hnrblock com 245, and the resulting increases, after rounding to the nearest $100, are added to the 1988 limitations to give the depreciation limitations applicable to passenger automobiles (other than trucks and vans) for calendar year 2012. Www hnrblock com This adjustment applies to all passenger automobiles (other than trucks and vans) that are first placed in service in calendar year 2012. Www hnrblock com (b) Trucks and vans. Www hnrblock com To determine the dollar limitations for trucks and vans first placed in service during calendar year 2012, the Service uses the new truck component of the CPI instead of the new car component. Www hnrblock com The new truck component of the CPI was 112. Www hnrblock com 4 for October 1987 and 146. Www hnrblock com 607 for October 2011. Www hnrblock com The October 2011 index exceeded the October 1987 index by 34. Www hnrblock com 207. Www hnrblock com Therefore, the automobile price inflation adjustment for 2012 for trucks and vans is 30. Www hnrblock com 43 percent (34. Www hnrblock com 207/112. Www hnrblock com 4 x 100%). Www hnrblock com The dollar limitations in § 280F(a) are multiplied by a factor of 0. Www hnrblock com 3043, and the resulting increases, after rounding to the nearest $100, are added to the 1988 limitations to give the depreciation limitations for trucks and vans. Www hnrblock com This adjustment applies to all trucks and vans that are first placed in service in calendar year 2012. Www hnrblock com (2) Amount of the limitation. Www hnrblock com Tables 1 through 4 contain the dollar amount of the depreciation limitation for each taxable year for passenger automobiles a taxpayer places in service in calendar year 2012. Www hnrblock com Use Table 1 for a passenger automobile (other than a truck or van), and Table 2 for a truck or van, placed in service in calendar year 2012 for which the § 168(k) additional first year depreciation deduction applies. Www hnrblock com Use Table 3 for a passenger automobile (other than a truck or van), and Table 4 for a truck or van, placed in service in calendar year 2012 for which the § 168(k) additional first year depreciation deduction does not apply. Www hnrblock com REV. Www hnrblock com PROC. Www hnrblock com 2012-23 TABLE 1 DEPRECIATION LIMITATIONS FOR PASSENGER AUTOMOBILES (THAT ARE NOT TRUCKS OR VANS) PLACED IN SERVICE IN CALENDAR YEAR 2012 FOR WHICH THE § 168(k) ADDITIONAL FIRST YEAR DEPRECIATION DEDUCTION APPLIES Tax Year Amount 1st Tax Year $11,160 2nd Tax Year $5,100 3rd Tax Year $3,050 Each Succeeding Year $1,875 REV. Www hnrblock com PROC. Www hnrblock com 2012-23 TABLE 2 DEPRECIATION LIMITATIONS FOR TRUCKS AND VANS PLACED IN SERVICE IN CALENDAR YEAR 2012 FOR WHICH THE § 168(k) ADDITIONAL FIRST YEAR DEPRECIATION DEDUCTION APPLIES Tax Year Amount 1st Tax Year $11,360 2nd Tax Year $5,300 3rd Tax Year $3,150 Each Succeeding Year $1,875 REV. Www hnrblock com PROC. Www hnrblock com 2012-23 TABLE 3 DEPRECIATION LIMITATIONS FOR PASSENGER AUTOMOBILES (THAT ARE NOT TRUCKS OR VANS) PLACED IN SERVICE IN CALENDAR YEAR 2012 FOR WHICH THE § 168(k) ADDITIONAL FIRST YEAR DEPRECIATION DEDUCTION DOES NOT APPLY Tax Year Amount 1st Tax Year $3,160 2nd Tax Year $5,100 3rd Tax Year $3,050 Each Succeeding Year $1,875 REV. Www hnrblock com PROC. Www hnrblock com 2012-23 TABLE 4 DEPRECIATION LIMITATIONS FOR TRUCKS AND VANS PLACED IN SERVICE IN CALENDAR YEAR 2012 FOR WHICH THE § 168(k) ADDITIONAL FIRST YEAR DEPRECIATION DEDUCTION DOES NOT APPLY Tax Year Amount 1st Tax Year $3,360 2nd Tax Year $5,300 3rd Tax Year $3,150 Each Succeeding Year $1,875 . Www hnrblock com 02 Inclusions in Income of Lessees of Passenger Automobiles. Www hnrblock com A taxpayer must follow the procedures in § 1. Www hnrblock com 280F-7(a) for determining the inclusion amounts for passenger automobiles first leased in calendar year 2012. Www hnrblock com In applying these procedures, lessees of passenger automobiles other than trucks and vans should use Table 5 of this revenue procedure, while lessees of trucks and vans should use Table 6 of this revenue procedure. Www hnrblock com REV. Www hnrblock com PROC. Www hnrblock com 2012-23 TABLE 5 DOLLAR AMOUNTS FOR PASSENGER AUTOMOBILES (THAT ARE NOT TRUCKS OR VANS) WITH A LEASE TERM BEGINNING IN CALENDAR YEAR 2012 Fair Market Value of Passenger Automobile Tax Year During Lease Over Not Over 1st 2nd 3rd 4th 5th & Later $18,500 $19,000 2 4 5 6 8 19,000 19,500 2 4 7 7 9 19,500 20,000 2 5 8 8 10 20,000 20,500 3 5 9 10 11 20,500 21,000 3 6 9 12 12 21,000 21,500 3 7 10 12 14 21,500 22,000 3 8 11 13 16 22,000 23,000 4 8 13 15 17 23,000 24,000 4 10 15 17 20 24,000 25,000 5 11 17 19 23 25,000 26,000 6 12 19 21 26 26,000 27,000 6 14 20 24 28 27,000 28,000 7 15 22 26 31 28,000 29,000 7 16 25 28 33 29,000 30,000 8 18 25 32 35 30,000 31,000 9 19 27 34 38 31,000 32,000 9 20 30 36 41 32,000 33,000 10 21 32 38 43 33,000 34,000 10 23 33 41 46 34,000 35,000 11 24 35 43 49 35,000 36,000 12 25 37 45 52 36,000 37,000 12 27 39 47 54 37,000 38,000 13 28 41 49 57 38,000 39,000 13 29 43 52 59 39,000 40,000 14 30 45 54 62 40,000 41,000 14 32 47 56 65 41,000 42,000 15 33 49 58 68 42,000 43,000 16 34 51 61 70 43,000 44,000 16 36 52 63 73 44,000 45,000 17 37 54 66 75 45,000 46,000 17 38 57 67 78 46,000 47,000 18 39 59 70 80 47,000 48,000 19 40 61 72 83 48,000 49,000 19 42 62 75 86 49,000 50,000 20 43 64 77 89 50,000 51,000 20 45 66 79 91 51,000 52,000 21 46 68 81 94 52,000 53,000 21 47 70 84 96 53,000 54,000 22 48 72 86 99 54,000 55,000 23 49 74 88 102 55,000 56,000 23 51 76 90 104 56,000 57,000 24 52 78 92 107 57,000 58,000 24 54 79 95 110 58,000 59,000 25 55 81 97 113 59,000 60,000 26 56 83 100 115 60,000 62,000 26 58 86 103 119 62,000 64,000 28 60 90 108 124 64,000 66,000 29 63 94 112 129 66,000 68,000 30 66 97 117 135 68,000 70,000 31 68 102 121 140 70,000 72,000 32 71 105 126 145 72,000 74,000 33 74 109 130 151 74,000 76,000 35 76 113 135 156 76,000 78,000 36 78 117 140 161 78,000 80,000 37 81 120 145 166 80,000 85,000 39 86 127 152 176 85,000 90,000 42 92 137 163 189 90,000 95,000 45 98 147 175 202 95,000 100,000 48 105 155 187 215 100,000 110,000 52 115 170 203 235 110,000 120,000 58 127 189 227 262 120,000 130,000 64 140 208 250 288 130,000 140,000 70 153 227 272 315 140,000 150,000 75 166 246 296 340 150,000 160,000 81 179 265 318 368 160,000 170,000 87 192 284 341 394 170,000 180,000 93 204 304 364 420 180,000 190,000 99 217 323 387 446 190,000 200,000 105 230 342 409 473 200,000 210,000 111 243 361 432 499 210,000 220,000 116 256 380 455 526 220,000 230,000 122 269 399 478 552 230,000 240,000 128 282 418 501 578 240,000 and up 134 294 437 524 605 REV. Www hnrblock com PROC. Www hnrblock com 2012-23 TABLE 6 DOLLAR AMOUNTS FOR TRUCKS AND VANS WITH A LEASE TERM BEGINNING IN CALENDAR YEAR 2012 Fair Market Value of Truck or Van Tax Year During Lease Over Not Over 1st 2nd 3rd 4th 5th & Later $19,000 $19,500 1 4 5 6 7 19,500 20,000 2 4 6 7 9 20,000 20,500 2 5 7 8 10 20,500 21,000 2 5 8 10 11 21,000 21,500 3 6 9 10 13 21,500 22,000 3 6 10 12 14 22,000 23,000 3 8 11 14 15 23,000 24,000 4 9 13 16 18 24,000 25,000 4 10 15 19 21 25,000 26,000 5 11 17 21 24 26,000 27,000 6 12 19 23 26 27,000 28,000 6 14 21 25 29 28,000 29,000 7 15 23 27 32 29,000 30,000 7 17 24 30 34 30,000 31,000 8 18 26 32 37 31,000 32,000 9 19 28 34 40 32,000 33,000 9 20 31 36 42 33,000 34,000 10 21 33 39 44 34,000 35,000 10 23 34 41 48 35,000 36,000 11 24 36 44 50 36,000 37,000 12 25 38 46 53 37,000 38,000 12 27 40 48 55 38,000 39,000 13 28 42 50 58 39,000 40,000 13 29 44 53 60 40,000 41,000 14 31 45 55 63 41,000 42,000 14 32 48 57 66 42,000 43,000 15 33 50 59 69 43,000 44,000 16 34 52 61 72 44,000 45,000 16 36 53 64 74 45,000 46,000 17 37 55 66 77 46,000 47,000 17 38 58 68 79 47,000 48,000 18 40 59 70 82 48,000 49,000 19 41 61 73 84 49,000 50,000 19 42 63 75 87 50,000 51,000 20 43 65 78 89 51,000 52,000 20 45 66 80 93 52,000 53,000 21 46 68 83 95 53,000 54,000 21 48 70 84 98 54,000 55,000 22 49 72 87 100 55,000 56,000 23 50 74 89 103 56,000 57,000 23 51 76 92 105 57,000 58,000 24 52 78 94 108 58,000 59,000 24 54 80 96 111 59,000 60,000 25 55 82 98 114 60,000 62,000 26 57 85 101 118 62,000 64,000 27 60 88 106 123 64,000 66,000 28 62 93 110 128 66,000 68,000 29 65 96 115 134 68,000 70,000 30 67 100 120 139 70,000 72,000 32 70 103 125 144 72,000 74,000 33 72 108 129 149 74,000 76,000 34 75 111 134 155 76,000 78,000 35 78 115 138 160 78,000 80,000 36 80 119 143 165 80,000 85,000 38 85 125 151 175 85,000 90,000 41 91 135 163 187 90,000 95,000 44 98 144 174 201 95,000 100,000 47 104 154 185 214 100,000 110,000 52 113 169 202 234 110,000 120,000 57 127 187 225 261 120,000 130,000 63 139 207 248 287 130,000 140,000 69 152 226 271 313 140,000 150,000 75 165 245 294 339 150,000 160,000 81 178 264 316 366 160,000 170,000 87 190 283 340 392 170,000 180,000 92 204 302 362 419 180,000 190,000 98 216 322 385 445 190,000 200,000 104 229 340 409 471 200,000 210,000 110 242 359 431 498 210,000 220,000 116 255 378 454 524 220,000 230,000 122 267 398 477 551 230,000 240,000 127 281 416 500 577 240,000 and up 133 294 435 523 603 SECTION 5. Www hnrblock com EFFECTIVE DATE This revenue procedure applies to passenger automobiles that a taxpayer first places in service or first leases during calendar year 2012. Www hnrblock com SECTION 6. Www hnrblock com DRAFTING INFORMATION The principal author of this revenue procedure is Bernard P. Www hnrblock com Harvey of the Office of Associate Chief Counsel (Income Tax & Accounting). Www hnrblock com For further information regarding this revenue procedure, contact Mr. Www hnrblock com Harvey at (202) 622-4930 (not a toll-free call). Www hnrblock com Prev  Up  Next   Home   More Internal Revenue Bulletins
Print - Click this link to Print this page

Tax Counseling for the Elderly

The Tax Counseling for the Elderly (TCE) program offers FREE tax help to individuals who are age 60 or older. Cooperative grant agreements are entered into between IRS and eligible organizations to provide tax assistance to elderly taxpayers. The funds provided by the IRS are used by organizations to reimburse volunteers for their out-of-pocket expenses; including transportation, meals and other expenses incurred by them in providing tax counseling assistance at locations convenient to the taxpayers.  

Tax return preparation assistance is provided to elderly taxpayers during the normal period for filing Federal income tax returns, which is from January 1 to April 15 each year. However, the program activities required to make sure elderly taxpayers receive efficient and quality tax assistance can be conducted year-round.

A sponsor awarded a grant is responsible for all aspects of operating the TCE program including, but not limited to publicity, recruitment, training, site selection and management of volunteers.  

Section 163 of the Revenue Act of 1978, Public Law No. 95-600, 92 Stat. 2810, November 6, 1978, authorizes IRS to enter into cooperative agreements.

This web page serves as a resource for organizations interested in applying for a TCE grant as well as for organizations who have been awarded a grant.

Select from the following categories to get started:

 

Contact the TCE Grant Program at tce.grant.office@irs.gov

Page Last Reviewed or Updated: 11-Sep-2013

The Www Hnrblock Com

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