[jeff]

Welcome to the Q4 2017 CPA Exam Study Group for REG. 🙂

Introduce yourselves and let your fellow NINJAs know when you plan to take your REG exam.

The Five Steps (NINJA Framework): https://www.another71.com/pass-the-cpa-exam/

[LCros]

@ Jennifer, that is correct!!! to back up your statement, check out IRC section 732.

Because the hot assets have a basis of zero to the partnership, they'll have a basis of zero in Li's hands as well and have no effect on Li's outside basis when distributed.

[pcunniff]

@j3cpa

Work this in order

Li's outside basis is his basis in the partnership.

Basis: 85,000
Less: cash received (20,000)
Less Hot assets: 0
85-20= 65 and that is the remaining basis. The land takes a basis of 65k because it is the remaining basis upon liquidation (aka cant be lower or 55.. if that is the outside basis to the partner).

Remember, gain is only recognized if cash distributed would be, say, 95k. Why? Because this would lower his basis beyond 0 and only cash distributed in excess of basis would generate a gain. Let me know if you need additional help.

You are wondering why hot assets arent taken? I immediately deducted the 5 until i read that the basis is $0 to the pship (outside basis). Aka you cant deduct that.

[pcunniff]

Wow finally starting to feel confident with this stuff. Last night I was up until 1:30am wondering why guaranteed payments reduce a partners basis in an LLC. I realized that CPA excel sims are loaded with typos because guaranteed payments are deducted by the partnership to arrive at income, which is then passed through and taxable to the individual partners.

Partners pickup the guaranteed pmts are ordinary income on their individual K1s and it DOES NOTHING TO BASIS. I realized you cant take the deduction like you would in a cash withdrawal because you cant double deduct something (it was already deducted by the pship)

If anyone else struggled on SIM (tbs.REGDOCrev004) and wants to let me know why the hell the guaranteed payment to IKE not only reduces his basis by the incorrect amount (should be 12k) but does at all? On the exam, I am putting down his basis with everything stated below minus that guaranteed pmt. If someone could explain why they would reduce it – i would appreciate it. As of now, its a typo in my opinion. Please prove me wrong.

Sim ANSWER:
Basis—Initial basis is typically the amount paid for the LLC interest including the adjusted basis of any assets contributed. Basis is adjusted each year to reflect the member's additional contributions and allocable share of income items, tax-exempt income items, distributions and withdrawals, and allocable share of separately stated deductions, nondeductible items, and loss items. Ike has a beginning basis of $25,000.

Ike
Initial basis—Amount contributed $25,000
Partner's share of income items:
Sales revenue 160,000
Short-term capital gain 1,250
Net income from rental real estate 11,000
Qualified dividends received 2,200
Tax-exempt interest income 500
Less: Partner's distributions 0
Less: Partner's share of loss items:
Advertising −3,000
Salaries to employees −41,600
Depreciation −667
Insurance −500
Utilities −1,533
Supplies −400
Taxes and licenses −250
Contribution to charity −1,200
Guaranteed payment −4,000
Ending basis in LLC interest $146,800

[jeff]

Ask the NINJAs: How to Recover from a 36 on the CPA Exam

Ask the NINJAs: How to Recover from a 36 on the CPA Exam

[jeff]

Ask the NINJAs: FAR CPA Exam Review Taking Too Long

Ask the NINJAs: FAR CPA Exam Review Taking Too Long

[mashloum]

I went through this question once twice and trice, but with no luck to understand!
Help plz..

In the current year, Kathy purchased a small apartment building for $200,000. She used $25,000 of her own money and $25,000 that she borrowed from her father to make the down payment. She signed a note to pay the remainder of the purchase price to the seller. Both the loan from her father and the debt to the seller were nonrecourse, secured only by the apartment building. The terms of both debts were commercially reasonable and on substantially the same terms as loans involving unrelated persons. Kathy’s at-risk limitation on losses is
Graded
a. $25,000
b. $175,000
c. $50,000
d. $200,000

Correct $200,000

This answer is correct.
The first $25,000 that Kathy personally invested is at risk since this is money that she contributed to the activity [Sec. 465(b)(1)(A)]. The $25,000 borrowed from her father comes under the special real property rules. Section 465(b)(6)(A) provides that a taxpayer is at risk with respect to his or her share of any qualified nonrecourse financing that is secured by real property used in the activity. The apartment is used in Kathy’s rental activities, so the “used in the activity” requirement is met. Qualified nonrecourse financing means any financing (1) that is borrowed by the taxpayer from a qualified person with respect to the activity of holding real property, (2) that is not convertible debt, and (3) for which no person is personally liable for repayment.

A qualified person is any person who is actively and regularly engaged in the business of lending money and who is not (1) a related person with respect to the taxpayer, (2) a person from whom the taxpayer acquired the property, or (3) a person who receives a fee with respect to the taxpayer’s investment in the property [Sec. 49(a)(1)(D)]. Kathy’s father is considered a related person. Section 465(b)(6)(D)(ii) permits a related person to be a qualified person if the financing terms are “commercially reasonable and on substantially the same terms as loans involving unrelated persons.”

[mardybum13]

Phil is selecting bids from contractors for construction of a garage. One bid is substantially lower than the others (bid 1 – $6000; bid 2 – $ 5600; bid 3 – $3200) so that it is obvious that there is a mistake in the bid. The bid will be a defense (to the unilateral mistake)

Apparently Phil should know/should've known its a mistake. Why is this a defense though? If I were Phil, it wouldn't have been obvious to me…

[CanPassAttitude]

Hi Ninjas. Does anyone have study material that helps simplify how basis is calculated for all the different scenarios?

[pcunniff]

3200 v 6000 isn't obvious to you? I wouldn't tell the IRS that

[pcunniff]

Can someone answer my question above about guaranteed pmts reducing basis? I feel like I'm the only one answering peoples questions here.

@mashloum – the at risk amount is the amount of the basis. Im not sure where the confusion is here, but his at risk amount is the basis of the asset. It wouldn't be reduced because a related party gave him money to buy it.

[mashloum]

@pcunniff

I think this is related to calculate the Partnership Income (loss) not related to the basis itself, and since it's cost to the partnership itself, that's why it's reduced

DEDUCTIONS TO ARRIVE AT PARTNERSHIP INCOME
<COGS>
<Wages> (Except for partners)
<Guaranteed Payments>
<Business Bad Debt> (Accrual basis only)
<Interest Paid> (payments to partners are OK)
<Depreciation> (except 179)
<Amortization of Startup Costs>
= Partnership Income

and then
GUARANTEED PAYMENTS
% Share of Ordinary Partnership Income (Loss) from K1
+ Guaranteed Payments
<% share of 179 expense>
= Self-Employment Income subject to Self-Employment Tax

[pokerchick]

Would anyone be able to explain at-risk basis to me in simple terms? I have read my textbook's explanation of at-risk basis over and over again, but it is still not really making sense to me. Thanks in advance.

[mashloum]

@pokerchick
I found this in a previous discussion
The at-risk rules iƒ a taxpayer's at-risk amount typically include the following:
– The amount of money or other property that is contributed to the venture
– Any liabilities for which the taxpayer is personally liable that relate to the investment
– An allocable share of nonrecourse debts incurred by the venture from third parties that relate to real estate activities
Also,
1)apply to all taxpayers (including partners) and encompass all business and investment activities.
2) The at-risk restrictions on deducting partnership losses provide that a partner may deduct his share of a loss from a partnership activity only to the extent to which he is at risk.
3) A partnership is not allowed a deduction for net operating losses (NOLs). A net operating loss (and any related c/b or c/f ) is determined at the partner level, taking into account all of the partner's applicable items of income and expense.
4) The expected tax has no bearing on the at-risk rules. The income tax will be the personal responsibility of the partner and not the partnership.

[pcunniff]

@mashloum i am an idiot. Sometimes you just gotta read the question. ORDINARY INCOME or the inside basis would be exactly that. Thank you

[pcunniff]

@pokerchick,

I had the exact same problem as you, so don't think you are alone. I read it over and over again and it finally made sense.
One of the major key points to this is the non-recourse liabilities. If you don't know the difference between them – i would suggest brushing up on that to understand what partners are generally liable for recourse v non recourse. I will help post them below.

Recourse liabilities – the amount each GENERAL Partner (not limited since the GP ultimately takes the liability risks associated with the partnership) is liable for regarding debt.

Non recourse liabilities – the amount each partner is not liable for. There is a good example in the book that states that a partner gets a loan from the bank and uses the house as collateral for the debt. Upon foreclosure (if it happens) the bank only takes away the house and nothing else (like a boat or other potential assets the individual may have).

That being said, the “at risk” amount would not include certain non-recourse liabilities to impact the “at risk” amount because of the fact that the partner will not incur additional losses upon something bad happening (filing for bankruptcy/losing a house because you can't afford it…etc). I hope that makes sense, but if you think about it logically, you aren't “at risk” for non recourse liabilities because you aren't subject or “liable” to it. Let me know if you need additional help clarifying.

@mashloum – you may want to read up on it too because non recourse liabilities to impact a limited partners at risk amount. Just an FYI.

[Author]

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