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Free file state taxes online 6. Free file state taxes online   Retail Tax on Heavy Trucks, Trailers, and Tractors Table of Contents Highway vehicle. Free file state taxes online Vehicles not considered highway vehicles. Free file state taxes online Idling reduction device. Free file state taxes online Separate purchase. Free file state taxes online Leases. Free file state taxes online Exported vehicle. Free file state taxes online Tax on resale of tax-paid trailers and semitrailers. Free file state taxes online Use treated as sale. Free file state taxes online Sale. Free file state taxes online Long-term lease. Free file state taxes online Short-term lease. Free file state taxes online Related person. Free file state taxes online Exclusions from tax base. Free file state taxes online Sales not at arm's length. Free file state taxes online Installment sales. Free file state taxes online Repairs and modifications. Free file state taxes online Further manufacture. Free file state taxes online Rail trailers and rail vans. Free file state taxes online Parts and accessories. Free file state taxes online Trash containers. Free file state taxes online House trailers. Free file state taxes online Camper coaches or bodies for self-propelled mobile homes. Free file state taxes online Farm feed, seed, and fertilizer equipment. Free file state taxes online Ambulances and hearses. Free file state taxes online Truck-tractors. Free file state taxes online Concrete mixers. Free file state taxes online Registration requirement. Free file state taxes online Further manufacture. Free file state taxes online A tax of 12% of the sales price is imposed on the first retail sale of the following articles, including related parts and accessories sold on or in connection with, or with the sale of, the articles. Free file state taxes online Truck chassis and bodies. Free file state taxes online Truck trailer and semitrailer chassis and bodies. Free file state taxes online Tractors of the kind chiefly used for highway transportation in combination with a trailer or semitrailer. Free file state taxes online A truck is a highway vehicle primarily designed to transport its load on the same chassis as the engine, even if it is equipped to tow a vehicle, such as a trailer or semitrailer. Free file state taxes online A tractor is a highway vehicle designed to tow a vehicle, such as a trailer or semitrailer. Free file state taxes online A tractor may carry incidental items of cargo when towing or limited amounts of cargo when not towing. Free file state taxes online A sale of a truck, truck trailer, or semitrailer is considered a sale of a chassis and a body. Free file state taxes online The seller is liable for the tax. Free file state taxes online Chassis or body. Free file state taxes online   A chassis or body is taxable only if you sell it for use as a component part of a highway vehicle that is a truck, truck trailer or semitrailer, or a tractor of the kind chiefly used for highway transportation in combination with a trailer or semitrailer. Free file state taxes online Highway vehicle. Free file state taxes online   A highway vehicle is any self-propelled vehicle designed to carry a load over public highways, whether or not it is also designed to perform other functions. Free file state taxes online Examples of vehicles designed to carry a load over public highways are passenger automobiles, motorcycles, buses, and highway-type trucks and truck tractors. Free file state taxes online A vehicle is a highway vehicle even though the vehicle's design allows it to perform a highway transportation function for only one of the following. Free file state taxes online A particular type of load, such as passengers, furnishings, and personal effects (as in a house, office, or utility trailer). Free file state taxes online A special kind of cargo, goods, supplies, or materials. Free file state taxes online Some off-highway task unrelated to highway transportation, except as discussed next. Free file state taxes online Vehicles not considered highway vehicles. Free file state taxes online   Generally, the following kinds of vehicles are not considered highway vehicles for purposes of the retail tax. Free file state taxes online Specially designed mobile machinery for nontransportation functions. Free file state taxes online A self-propelled vehicle is not a highway vehicle if all the following apply. Free file state taxes online The chassis has permanently mounted to it machinery or equipment used to perform certain operations (construction, manufacturing, drilling, mining, timbering, processing, farming, or similar operations) if the operation of the machinery or equipment is unrelated to transportation on or off the public highways. Free file state taxes online The chassis has been specially designed to serve only as a mobile carriage and mount (and power source, if applicable) for the machinery or equipment, whether or not the machinery or equipment is in operation. Free file state taxes online The chassis could not, because of its special design and without substantial structural modification, be used as part of a vehicle designed to carry any other load. Free file state taxes online Vehicles specially designed for off-highway transportation. Free file state taxes online A vehicle is not treated as a highway vehicle if the vehicle is specially designed for the primary function of transporting a particular type of load other than over the public highway and because of this special design, the vehicles's capability to transport a load over a public highway is substantially limited or impaired. Free file state taxes online To make this determination, you can take into account the vehicle's size, whether the vehicle is subject to licensing, safety, or other requirements, and whether the vehicle can transport a load at a sustained speed of at least 25 miles per hour. Free file state taxes online It does not matter that the vehicle can carry heavier loads off highway than it is allowed to carry over the highway. Free file state taxes online Nontransportation trailers and semitrailers. Free file state taxes online A trailer or semitrailer is not treated as a highway vehicle if it is specially designed to function only as an enclosed stationary shelter for carrying on a nontransportation function at an off-highway site. Free file state taxes online For example, a trailer that is capable only of functioning as an office for an off-highway construction operation is not a highway vehicle. Free file state taxes online Gross vehicle weight. Free file state taxes online   The tax does not apply to truck chassis and bodies suitable for use with a vehicle that has a gross vehicle weight (defined below) of 33,000 pounds or less. Free file state taxes online It also does not apply to truck trailer and semitrailer chassis and bodies suitable for use with a trailer or semitrailer that has a gross vehicle weight of 26,000 pounds or less. Free file state taxes online Tractors that have a gross vehicle weight of 19,500 pounds or less and a gross combined weight of 33,000 pounds or less are excluded from the 12% retail tax. Free file state taxes online   The following four classifications of truck body types meet the suitable for use standard and will be excluded from the retail excise tax. Free file state taxes online Platform truck bodies 21 feet or less in length. Free file state taxes online Dry freight and refrigerated truck van bodies 24 feet or less in length. Free file state taxes online Dump truck bodies with load capacities of 8 cubic yards or less. Free file state taxes online Refuse packer truck bodies with load capacities of 20 cubic yards or less. Free file state taxes online For more information on these classifications, see Revenue Procedure 2005-19, which is on page 832 of I. Free file state taxes online R. Free file state taxes online B. Free file state taxes online 2005-14 at www. Free file state taxes online irs. Free file state taxes online gov/pub/irs-irbs/irb05-14. Free file state taxes online pdf. Free file state taxes online   The gross vehicle weight means the maximum total weight of a loaded vehicle. Free file state taxes online Generally, this maximum total weight is the gross vehicle weight rating provided by the manufacturer or determined by the seller of the completed article. Free file state taxes online The seller's gross vehicle weight rating is determined solely on the basis of the strength of the chassis frame and the axle capacity and placement. Free file state taxes online The seller may not take into account any readily attachable components (such as tires or rim assemblies) in determining the gross vehicle weight. Free file state taxes online See Regulations section 145. Free file state taxes online 4051-1(e)(3) for more information. Free file state taxes online Parts or accessories. Free file state taxes online   The tax applies to parts or accessories sold on or in connection with, or with the sale of, a taxable article. Free file state taxes online For example, if at the time of the sale by the retailer, the part or accessory has been ordered from the retailer, the part or accessory will be considered as sold in connection with the sale of the vehicle. Free file state taxes online The tax applies in this case whether or not the retailer bills the parts or accessories separately. Free file state taxes online   If the retailer sells a taxable chassis, body, or tractor without parts or accessories considered essential for the operation or appearance of the taxable article, the sale of the parts or accessories by the retailer to the purchaser is considered made in connection with the sale of the taxable article even though they are shipped separately, at the same time, or on a different date. Free file state taxes online The tax applies unless there is evidence to the contrary. Free file state taxes online For example, if a retailer sells to any person a chassis and the bumpers for the chassis, or sells a taxable tractor and the fifth wheel and attachments, the tax applies to the parts or accessories regardless of the method of billing or the time at which the shipments were made. Free file state taxes online The tax does not apply to parts and accessories that are spares or replacements. Free file state taxes online   The tax imposed on parts and accessories sold on or in connection with the taxable articles listed earlier and the tax imposed on the separate purchase of parts and accessories (discussed next) for the taxable articles listed earlier do not apply to an idling reduction device or insulation that has an R value of at least R35 per inch. Free file state taxes online Idling reduction device. Free file state taxes online   An idling reduction device is any device or system of devices that provide the tractor with services, such as heat, air conditioning, and electricity, without the use of the main drive engine while the tractor is temporarily parked or stationary. Free file state taxes online The device must be affixed to the tractor and determined by the Administrator of the EPA, in consultation with the Secretary of Energy and Secretary of Transportation, to reduce idling while parked or stationary. Free file state taxes online The EPA discusses idling reduction technologies on its website at www. Free file state taxes online epa. Free file state taxes online gov/smartway/technology/idling. Free file state taxes online htm. Free file state taxes online Separate purchase. Free file state taxes online   The tax generally applies to the price of a part or accessory and its installation if the following conditions are met. Free file state taxes online The owner, lessee, or operator of any vehicle that contains a taxable article installs any part or accessory on the vehicle. Free file state taxes online The installation occurs within 6 months after the vehicle is first placed in service. Free file state taxes online   The owners of the trade or business installing the parts or accessories are secondarily liable for the tax. Free file state taxes online   A vehicle is placed in service on the date the owner takes actual possession of the vehicle. Free file state taxes online This date is established by a signed delivery ticket or other comparable document indicating delivery to and acceptance by the owner. Free file state taxes online   The tax does not apply if the installed part or accessory is a replacement part or accessory. Free file state taxes online The tax also does not apply if the total price of the parts and accessories, including installation charges, during the 6-month period is $1,000 or less. Free file state taxes online However, if the total price is more than $1,000, the tax applies to the cost of all parts and accessories (and installation charges) during that period. Free file state taxes online Example. Free file state taxes online You bought a taxable vehicle and placed it in service on April 8. Free file state taxes online On May 3, you bought and installed parts and accessories at a cost of $850. Free file state taxes online On July 15, you bought and installed parts and accessories for $300. Free file state taxes online Tax of $138 (12% of $1,150) applies on July 15. Free file state taxes online Also, tax will apply to any costs of additional parts and accessories installed on the vehicle before October 8. Free file state taxes online First retail sale defined. Free file state taxes online   The sale of an article is treated as the first retail sale, and the seller will be liable for the tax imposed on the sale unless one of the following exceptions applies. Free file state taxes online There has been a prior taxable sale, lease, or use of the article (however, see Tax on resale of tax-paid trailers and semitrailers, later). Free file state taxes online The sale qualifies as a tax-free sale under section 4221 (see Sales exempt from tax, later). Free file state taxes online The seller in good faith accepts from the purchaser a statement signed under penalties of perjury and executed in good faith that the purchaser intends to resell the article or lease it on a long-term basis. Free file state taxes online There is no registration requirement. Free file state taxes online Leases. Free file state taxes online   A long-term lease (a lease with a term of 1 year or more, taking into account options to renew) before a first retail sale is treated as a taxable sale. Free file state taxes online The tax is imposed on the lessor at the time of the lease. Free file state taxes online   A short-term lease (a lease with a term of less than 1 year, taking into account options to renew) before a first retail sale is treated as a taxable use. Free file state taxes online The tax is imposed on the lessor at the time of the lease. Free file state taxes online Exported vehicle. Free file state taxes online   A vehicle exported before its first retail sale, used in a foreign country, and then returned to the United States is subject to the retail tax on its first domestic use or retail sale after importation. Free file state taxes online Tax on resale of tax-paid trailers and semitrailers. Free file state taxes online   The tax applies to a trailer or semitrailer resold within 6 months after having been sold in a taxable sale. Free file state taxes online The seller liable for the tax on the resale can claim a credit equal to the tax paid on the prior taxable sale. Free file state taxes online The credit cannot exceed the tax on the resale. Free file state taxes online See Regulations section 145. Free file state taxes online 4052-1(a)(4) for information on the conditions to allowance for the credit. Free file state taxes online Use treated as sale. Free file state taxes online   If any person uses a taxable article before the first retail sale of the article, that person is liable for the tax as if the article had been sold at retail by that person. Free file state taxes online Figure the tax on the price at which similar articles are sold in the ordinary course of trade by retailers. Free file state taxes online The tax attaches when the use begins. Free file state taxes online   If the seller of an article regularly sells the articles at retail in arm's-length transactions, figure the tax on its use on the lowest established retail price for the articles in effect at the time of the taxable use. Free file state taxes online   If the seller of an article does not regularly sell the articles at retail in arm's-length transactions, a constructive price on which the tax is figured will be determined by the IRS after considering the selling practices and price structures of sellers of similar articles. Free file state taxes online   If a seller of an article incurs liability for tax on the use of the article and later sells or leases the article in a transaction that otherwise would be taxable, liability for tax is not incurred on the later sale or lease. Free file state taxes online Presumptive retail sales price. Free file state taxes online   There are rules to ensure that the tax base of transactions considered to be taxable sales includes either an actual or presumed markup percentage. Free file state taxes online If the person liable for tax is the vehicle's manufacturer, producer, or importer, the following discussions show how you figure the presumptive retail sales price depending on the type of transaction and the persons involved in the transaction. Free file state taxes online Table 6-1 outlines the appropriate tax base calculation for various transactions. Free file state taxes online   The presumed markup percentage to be used for trucks and truck-tractors is 4%. Free file state taxes online But for truck trailers and semitrailers and remanufactured trucks and tractors, the presumed markup percentage is zero. Free file state taxes online Sale. Free file state taxes online   For a taxable sale by a manufacturer, producer, importer, or related person, you generally figure the tax on a tax base of the sales price plus an amount equal to the presumed markup percentage times that sales price. Free file state taxes online Long-term lease. Free file state taxes online   In the case of a long-term lease by a manufacturer, producer, importer, or related person, figure the tax on a tax base of the constructive sales price plus an amount equal to the presumed markup percentage times the constructive sales price. Free file state taxes online Short-term lease. Free file state taxes online   When a manufacturer, producer, importer, or related person leases an article in a short-term lease considered a taxable use, figure the tax on a constructive sales price at which those or similar articles generally are sold in the ordinary course of trade by retailers. Free file state taxes online   But if the lessor in this situation regularly sells articles at retail in arm's-length transactions, figure the tax on the lowest established retail price in effect at the time of the taxable use. Free file state taxes online   If a person other than the manufacturer, producer, importer, or related person leases an article in a short-term lease considered a taxable use, figure the tax on a tax base of the price for which the article was sold to the lessor plus the cost of parts and accessories installed by the lessor and a presumed markup percentage. Free file state taxes online Related person. Free file state taxes online   A related person is any member of the same controlled group as the manufacturer, producer, or importer. Free file state taxes online Do not treat as a related person a person that sells the articles through a permanent retail establishment in the normal course of being a retailer if that person has records to prove the article was sold for a price that included a markup equal to or greater than the presumed markup percentage. Free file state taxes online Table 6-1. Free file state taxes online Tax Base IF the transaction is a. Free file state taxes online . Free file state taxes online . Free file state taxes online THEN figuring the base by using the. Free file state taxes online . Free file state taxes online . Free file state taxes online Sale by the manufacturer, producer, importer, or related person Sales price plus (presumed markup percentage × sales price) Sale by the dealer Total consideration paid for the item including any charges incident to placing it in a condition ready for use Long-term lease by the manufacturer, producer, importer, or related person Constructive sales price plus (presumed markup percentage × constructive sales price) Short-term lease by the manufacturer, producer, importer, or related person Constructive sales price at which such or similar articles are sold Short-term lease by a lessor other than the manufacturer, producer, importer, or related person Price for which the article was sold to the lessor plus the cost of parts and accessories installed by the lessor plus a presumed markup percentage Short-term lease where the articles are regularly sold at arm's length Lowest established retail price in effect at the time of the taxable use General rule for sales by dealers to the consumer. Free file state taxes online   For a taxable sale, other than a long-term lease, by a person other than a manufacturer, producer, importer, or related person, your tax base is the retail sales price as discussed next under Determination of tax base. Free file state taxes online   When you sell an article to the consumer, generally you do not add a presumed markup to the tax base. Free file state taxes online However, you do add a markup if all the following apply. Free file state taxes online You do not perform any significant activities relating to the processing of the sale of a taxable article. Free file state taxes online The main reason for processing the sale through you is to avoid or evade the presumed markup. Free file state taxes online You do not have records proving that the article was sold for a price that included a markup equal to or greater than the presumed markup percentage. Free file state taxes online In these situations, your tax base is the sales price plus an amount equal to the presumed markup percentage times that selling price. Free file state taxes online Determination of tax base. Free file state taxes online   These rules apply to both normal retail sales price and presumptive retail sales price computations. Free file state taxes online To arrive at the tax base, the price is the total consideration paid (including trade-in allowance) for the item and includes any charge incident to placing the article in a condition ready for use. Free file state taxes online However, see Presumptive retail sales price, earlier. Free file state taxes online Exclusions from tax base. Free file state taxes online   Exclude from the tax base the retail excise tax imposed on the sale. Free file state taxes online Exclude any state or local retail sales tax if stated as a separate charge from the price whether the sales tax is imposed on the seller or purchaser. Free file state taxes online Also exclude the value of any used component of the article furnished by the first user of the article. Free file state taxes online   Exclude charges for transportation, delivery, insurance, and installation (other than installation charges for parts and accessories, discussed earlier) and other expenses incurred in connection with the delivery of an article to a purchaser. Free file state taxes online These expenses are those incurred in delivery from the retail dealer to the customer. Free file state taxes online In the case of delivery directly from the manufacturer to the dealer's customer, include the transportation and delivery charges to the extent the charges do not exceed what it would have cost to ship the article to the dealer. Free file state taxes online   Exclude amounts charged for machinery or equipment that does not contribute to the highway transportation function of the vehicle, provided those charges are supported by adequate records. Free file state taxes online For example, for an industrial vacuum loader vehicle, exclude amounts charged for the vacuum pump and hose, filter system, material separator, silencer or muffler, control cabinet, and ladder. Free file state taxes online Similarly, for a sewer cleaning vehicle, exclude amounts charged for the high pressure water pump, hose components, and the vacuum pipe. Free file state taxes online Sales not at arm's length. Free file state taxes online   For any taxable article sold (not at arm's length) at less than the fair market price, figure the excise tax on the price for which similar articles are sold at retail in the ordinary course of trade. Free file state taxes online   A sale is not at arm's length if either of the following apply. Free file state taxes online One of the parties is controlled (in law or in fact) by the other or there is common control, whether or not the control is actually exercised to influence the sales price. Free file state taxes online The sale is made under special arrangements between a seller and a purchaser. Free file state taxes online Installment sales. Free file state taxes online   If the first retail sale is an installment sale, or other form of sale in which the sales price is paid in installments, tax liability arises at the time of the sale. Free file state taxes online The tax is figured on the entire sales price. Free file state taxes online No part of the tax is deferred because the sales price is paid in installments. Free file state taxes online Repairs and modifications. Free file state taxes online   The tax does not apply to the sale or use of an article that has been repaired or modified unless the cost of the repairs and modifications is more than 75% of the retail price of a comparable new article. Free file state taxes online This includes modifications that change the transportation function of an article or restore a wrecked article to a functional condition. Free file state taxes online However, this exception generally does not apply to an article that was not subject to the tax when it was new. Free file state taxes online Further manufacture. Free file state taxes online   The tax does not apply to the use by a person of a taxable article as material in the manufacture or production of, or as a component part of, another article to be manufactured or produced by that person. Free file state taxes online Do not treat a person as engaged in the manufacture of any article merely because that person combines the article with a: Coupling device (including any fifth wheel); Wrecker crane; Loading and unloading equipment (including any crane, hoist, winch, or power liftgate); Aerial ladder or tower; Ice and snow control equipment; Earth moving, excavation, and construction equipment; Spreader; Sleeper cab; Cab shield; or Wood or metal floor. Free file state taxes online Combining an article with an item in this list does not give rise to taxability. Free file state taxes online However, see Parts or accessories discussed earlier. Free file state taxes online Articles exempt from tax. Free file state taxes online   The tax on heavy trucks, trailers, and tractors does not apply to sales of the articles described in the following discussions. Free file state taxes online Rail trailers and rail vans. Free file state taxes online   This is any chassis or body of a trailer or semitrailer designed for use both as a highway vehicle and a railroad car (including any parts and accessories designed primarily for use on and in connection with it). Free file state taxes online Do not treat a piggyback trailer or semitrailer as designed for use as a railroad car. Free file state taxes online Parts and accessories. Free file state taxes online   This is any part or accessory sold separately from the truck or trailer, except as described earlier under Parts or accessories and Separate purchase. Free file state taxes online Trash containers. Free file state taxes online   This is any box, container, receptacle, bin, or similar article that meets all the following conditions. Free file state taxes online It is designed to be used as a trash container. Free file state taxes online It is not designed to carry freight other than trash. Free file state taxes online It is not designed to be permanently mounted on or affixed to a truck chassis or body. Free file state taxes online House trailers. Free file state taxes online   This is any house trailer (regardless of size) suitable for use in connection with either passenger automobiles or trucks. Free file state taxes online Camper coaches or bodies for self-propelled mobile homes. Free file state taxes online   This is any article designed to be mounted or placed on trucks, truck chassis, or automobile chassis and to be used primarily as living quarters or camping accommodations. Free file state taxes online Further, the tax does not apply to chassis specifically designed and constructed to accommodate and transport self-propelled mobile home bodies. Free file state taxes online Farm feed, seed, and fertilizer equipment. Free file state taxes online   This is any body primarily designed to process or prepare, haul, spread, load, or unload feed, seed, or fertilizer to or on farms. Free file state taxes online This exemption applies only to the farm equipment body (and parts and accessories) and not to the chassis upon which the farm equipment is mounted. Free file state taxes online Ambulances and hearses. Free file state taxes online   This is any ambulance, hearse, or combination ambulance-hearse. Free file state taxes online Truck-tractors. Free file state taxes online   This is any truck-tractor specifically designed for use in shifting semitrailers in and around freight yards and freight terminals. Free file state taxes online Concrete mixers. Free file state taxes online   This is any article designed to be placed or mounted on a truck, truck trailer, or semitrailer chassis to be used to process or prepare concrete. Free file state taxes online This exemption does not apply to the chassis on which the article is mounted. Free file state taxes online Sales exempt from tax. Free file state taxes online   The following sales are ordinarily exempt from tax. Free file state taxes online Sales to a state or local government for its exclusive use. Free file state taxes online Sales to Indian tribal governments, but only if the transaction involves the exercise of an essential tribal government function. Free file state taxes online Sales to a nonprofit educational organization for its exclusive use. Free file state taxes online Sales to a qualified blood collector organization (as defined under Communications Tax in chapter 4) for its exclusive use in the collection, storage, or transportation of blood. Free file state taxes online Sales for use by the purchaser for further manufacture of other taxable articles (see below). Free file state taxes online Sales for export or for resale by the purchaser to a second purchaser for export. Free file state taxes online Sales to the United Nations for official use. Free file state taxes online Registration requirement. Free file state taxes online   In general, the seller and buyer must be registered for a sale to be tax free. Free file state taxes online See the Form 637 instructions for more information. Free file state taxes online Certain registration exceptions apply in the case of sales to state and local governments, sales to foreign purchasers for export, and sales for resale or long term leasing. Free file state taxes online Further manufacture. Free file state taxes online   If you buy articles tax free and resell or use them other than in the manufacture of another article, you are liable for the tax on their resale or use just as if you had manufactured and made the first retail sale of them. Free file state taxes online Credits or refunds. Free file state taxes online   A credit or refund (without interest) of the retail tax on the taxable articles described earlier may be allowable if the tax has been paid with respect to an article and, before any other use, such article is used by any person as a component part of another taxable article manufactured or produced. Free file state taxes online The person using the article as a component part is eligible for the credit or refund. Free file state taxes online   A credit or refund is allowable if, before any other use, an article is, by any person: Exported, Used or sold for use as supplies for vessels, Sold to a state or local government for its exclusive use, Sold to a nonprofit educational organization for its exclusive use, or Sold to a qualified blood collector organization (as defined under Communications Tax in chapter 4) for its exclusive use in the collection, storage, or transportation of blood. Free file state taxes online A credit or refund is also allowable if there is a price readjustment by reason of the return or repossession of an article or by reason of a bona fide discount, rebate, or allowance. Free file state taxes online   See also Conditions to allowance in chapter 5. Free file state taxes online Tire credit. Free file state taxes online   A credit is allowed against the retail tax on the taxable articles described earlier if taxable tires are sold on or in connection with the sale of the article. Free file state taxes online The credit is equal to the manufacturers excise tax imposed on the taxable tires (discussed earlier). Free file state taxes online This is the section 4051(d) taxable tire credit and is claimed on Schedule C (Form 720) for the same quarter for which the tax on the heavy vehicle is reported. Free file state taxes online Prev  Up  Next   Home   More Online Publications
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A-Z Index of Consumer Organizations

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