[hopefulcpa28]

I understand that the partnership income is taxable to the partner, regardless whether it was distributed or not? However, is this part of an ordinary income?

When you receive guaranteed payments, it’s part of your ordinary income…

When you sell your rights of partnership, it’s either capital gain or loss, ordinary for hot assets…

When you retire, and continue to receive payment, it’s capital as well….

However, when you retire, and you receive payment depending on partnerships’ income, it’s not capital…but ordinary, correct?

I’m bit confused on it, any help is appreciated:)

[Anonymous]

“When you receive guaranteed payments, it's part of your ordinary income…”

Yes, the Partnership treats that as an expense while the Partner receiving the guaranteed payment is treating it as part of Ordinary Income.

“When you sell your rights of partnership, it's either capital gain or loss, ordinary for hot assets…”

Are you talking about selling your partnership interest?? If so, then you need to add your cash received and your liabilities you’re being relieved of. That will be your amount realized. Amount Realized – Your Basis = Gain

Your gain is Ordinary to the extent of Unrealized Receivables and Appreciated Inventory. Any remainder is Capital Gain.

[hopefulcpa28]

Perfect, so far so good!

How about the income you earned from partnership (your share)? Partners earn income/get taxed on it even if they don't withdraw it…what is that? That's ordinary income, right? or that passive income?

[Anonymous]

The Partners get taxed on their % of the Partnership Income and on the Guaranteed Payments received. However, a note of caution….Guaranteed Payments have no affect on the Partner's basis.

[thechamp26]

@hopefulcpa28 – the amounts on a K-1 a partner gets from a partnership is entered on Schedule E. Schedule E break outs the passive/nonpassive items and comes up with a total. That total then goes to page 1 of the 1040 to be included in income.

[thechamp26]

CPAMan – guaranteed payments do affect partners basis in some situations.

[hopefulcpa28]

Thanks, guys!!

The only way I think guaranteed payment affect your basis is because guaranteed payment is taken out of the business income, thus lowering business net income…in effect, lowering your share of your basis. Right?

[thechamp26]

@hopeful – correct.

[Anonymous]

@thechamp26- What would those situations be?? My lousy review books don't get into that much detail about it.

Let's say a partner receives $10,000 of GP. That $10,000 will not increase nor decrease the basis. It will reduce the Ordinary Income of the partnership, thus reducing your share of the Ordinary Income. Therefore, your basis won't increase as much as it would have had you not had a GP. But that's all I can think of. But AFAIK, GP doesn't directly affect your basis. If there is another weird quirk that I'm not aware of, please let me know.

Something tells me that the amount of quirks that we're discussing here is beyond the scope of the exam. I have done over 1,000 questions on the Gleim software and suffered through each question trying to learn the concept and quirks. And even Gleim's questions go beyond the scope of the exam. So since I'm still being introduced to some other quirks from people's questions here, I have a slight hunch that a lot of us (including myself) are stressing over things that are unnecessary. Just my 2 cents….

[thechamp26]

@CPAMan – there are 2 parts to a guaranteed payment.. a partnership tax deduction and income to a partner. Guaranteed payments are deducted by partnerships to get to ordinary income. The ordinary income (which includes the GP deduction) is then distributed to each partner, which we know affects their basis.

Now, the treatment of the guaranteed payment that a partner receives is ordinary income, which the partner picks up on their individual return. This part of the payment does not affect the receiving partner's basis.

In my opinion, this is pretty important. Knowing how to calculate a partner's basis in a partnership.

[Anonymous]

Oh yeah, that I know. What I was talking about is this….

A partner's basis $40,000. He receives $10,000 GP. Some people will be like, “Oh!! He's getting $10,000, so that increases his basis by $10,000. Therefore his ending basis is $50,000.” That's wrong and that's what I initially was talking about. If you get that question on an exam, guess what? $50,000 will be one of the choices, so look out for that trick!

[thechamp26]

Gotcha – I just wanted to make sure we got both sides of the fence. It looks like you sit for Reg Friday? I sit tomorrow… We got this!

[Anonymous]

To clarify with an example….

Partnership Income is $100,000

Alex is a 50% partner and has a beginning basis of $50,000

Alex gets GP of $10,000

Alex’s Ordinary Income is….

GP: $10,000

+50% of Partnership Income less GP: $45,000

=Total Ordinary Income that Alex gets taxed on is… $55,000

Alex’s Basis is…

Beginning Basis: $50,000

+ Share of Partnership Income: $45,000

=Ending Basis: $95,000

Do not add the $10,000 to compute your Basis. That’s what I meant. Just wanted to clarify to make sure I’m not confusing anyone, lol.

Yeah, my exam is Friday and my brain is fried. I’m trying so hard to stay confident as that’s main thing that we need in order to pass. But we can do this. We can kill REG!

[hopefulcpa28]

CPAMan, you are awesome!! Thanks for explaining it so well!!

Good Luck on Friday, you can do it!!!

[Author]

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