Partnerships
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Partnerships
Does the above transaction qualify for a tax-free exchange similar to Sec. 351 for corporations? If so, what code section contains the rule for tax-free exchanges for partnerships?
The transaction above qualifies for taxation if the partners have transferred their assets into the newly formed entity as the new assets are considered as purchases of the entity. However if the business is identical to the previous individual undertakings of the business, then they do not qualify for taxation. Nevertheless, if purpose of forming a partnership was a new venture for the individuals then they are liable to submit their assets for taxation as well as relief for such assets as provided for in investment deductions. Sec 351 of corporations are instances whereby the transactions are treated as if the passage of consideration or funds took place for services or goods, which is a taxable transaction. The Section 1031 of tax-free exchanges creates room for tax-free conduct of business from a partnership aspect with specific reference to transfer of assets in real estate (Cunningham, & Cunningham, 2008).
Tax exchange is denied when individuals within the partnership have distributed interests in real estate or others assets and if either some of the partners sought to exchange the same assets. In addition, it can be denied if the partnership undertook a 1031 exchange and at the same instance distributed the real estate assets in the agreed sharing ratios in the individual names of the partners.
Compute the partners’ basis in the units received in the exchange.
Accounting Profit (services) $500,000
Add: Depreciation – building (non-deductible)
Depreciation – plant **
Doubtful debts expense **
500,000
Less
Government grant (non assessable) (-)
Depreciation – plant (for tax purposes) (110,000)
Taxable income 390,000 (Cunningham, & Cunningham, 2008)
Prepare a tax balance sheet for Plummet Company (assuming it is a partnership).
Plummet Company Balance for the Period Ended June ** 20**.
Non-current assets
Gain asset revaluation account 0
Current assets
Transferred stock 50,000
Goodwill
Deferred tax asset 400,000
Income (when received) 50,000
Debtors (when Received) 50,000 550,000
Less: Liabilities
Depreciation of assets (accelerated) ***
Less shares in favor of 3rd parties (taxed when paid or w/off) 50,000
Tax loss (offset against next income) 0 (50,000)
Owner’s equity 500,000
(Net Income) Assessable income less allowable deductions 500,000
Total Equity 500,000
What are the tax issues facing John and Jill in connection with withdrawing money from the partnership? Discuss the same options as in module three and show the associated tax consequences.
The organization has an obligation of providing adequate disclosures in terms of the assets held and the accrued income of the entity within the respective financial year or taxable period. The entity has an obligation of recognition and calculation of current tax assets and liabilities. It also has a responsibility of recognition and calculation of the deferred tax assets as well as liabilities. The organization is obliged to report its financial statements in accordance to the financial standards of preparation of statements and their disclosures (Freeman, Nitschke, & Practicing Law Institute, 2001).
Interest accrued on drawing is liable for tax because they drawings are considered as to have accrued income in the form of tax. The partner profits are liable for tax deductions because the incomes are derived from conduct of business of the organization. In addition, the assets brought into the business should be submitted for tax assessment such that they are charged and the deductions for the assets are carried out (Freeman, Nitschke, & Practicing Law Institute, 2001).
References
Cunningham, L. E., & Cunningham, N. B. (2008). Learning the logic of subchapter K: Problems and assignments for a course in the taxation of partnerships. St. Paul, MN: Thomson/West.
Freeman, L. S., Nitschke, D. F., & Practising Law Institute. (2001). Tax planning for domestic & foreign partnerships, LLCs, joint ventures, & other strategic alliances, 2001. New York, NY: Practising Law Institute.
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