Filing Your Taxes Online is Fast, Easy and Secure.
Start now and receive your tax refund in as little as 7 days.

1. Get Answers

Your online questions are customized to your unique tax situation.

2. Maximize your Refund

Find tax credits for everything from school tuition to buying a hybri

3. E-File for FREE

E-file free with direct deposit to get your refund in as few as 7 days.

Filing your taxes with paper mail can be difficult and it could take weeks for your refund to arrive. IRS e-file is easy, fast and secure. There is no paperwork going to the IRS so tax refunds can be processed in as little as 7 days with direct deposit. As you prepare your taxes online, you can see your tax refund in real time.

FREE audit support and representation from an enrolled agent – NEW and only from H&R Block

Tax Return For Students 2011

Irs Free Tax Preparation OnlineAmend Federal TaxesHow To Make A Tax Amendment1040formWww Onlinetaxes H&rblock ComHow To Fill Out A 1040x Tax Amendment FormH&r Block's Free File1040ez InstuctionsFile Your State Taxes Online For FreeWww 1040 ComIrs Forms 1040 Ez1040a Tax FormFile Extension For FreePrintable 1040ez Tax FormFree Ez FormHow To File Your 2012 Tax ReturnIrs Tax Extension FormFree Federal Tax ReturnWww Irs Gov 2012 Tax FormsHr Block State TaxesEz FormSearch Irs Gov FreefileFree Efile TaxesLate TaxesHow To File Your Taxes Online For FreeE File Tax Returns1040x AmendedWhere Do I Send My 2012 Tax Return2013 Irs Form 1040 EzWww Freefile Dor In Gov1040x Form For 2010File 2012 TaxesIrs Free Tax ReturnTaxact 2012H&r Block State Tax FeeMilitary H And R Block FreeTurbotax Military 2012How To Amend Tax Return Online1040nr Ez InstructionAmended 1040 Ez

Tax Return For Students 2011

Tax return for students 2011 Index A Adoption Child tax credit, Adopted child. Tax return for students 2011 (see also Child tax credit) Afghanistan, Afghanistan area. Tax return for students 2011 Aliens, Alien Status Amount of exclusion, Amount of Exclusion Arabian peninsula, Arabian peninsula. Tax return for students 2011 Assistance (see Tax help) C Child tax credit, Child Tax Credit Limits Modified adjusted gross income, Modified AGI. Tax return for students 2011 Qualifying child, Qualifying Child Child, qualifying, Qualifying child. Tax return for students 2011 Claims for tax forgiveness, Claims for Tax Forgiveness Codes, W-2, Form W-2 Codes Combat zone Election to include pay for earned income credit, Nontaxable combat pay election. Tax return for students 2011 Exclusion, Combat Zone Exclusion Extension of deadlines, Service That Qualifies for an Extension of Deadline Related forgiveness, Combat Zone Related Forgiveness Community property, Community Property, Residents of community property states. Tax return for students 2011 Contingency operation, Service That Qualifies for an Extension of Deadline Credits Child tax, Child Tax Credit Earned income, Earned Income Credit Excess social security tax withheld, Credit for Excess Social Security Tax Withheld First-time homebuyer, First-Time Homebuyer Credit D Decedents, Forgiveness of Decedent's Tax Liability Deductions, itemized, Itemized Deductions Domicile, Domicile. Tax return for students 2011 Dual-status aliens, Dual-Status Aliens E Earned income credit, Earned Income Credit Social security card, Social security number. Tax return for students 2011 Social security number, Social security number. Tax return for students 2011 Educational expenses, Educational Expenses Employee business expenses, Employee Business Expenses Excess social security tax withholding credit, Credit for Excess Social Security Tax Withheld Excess withholding credit How to take, How to take the credit. Tax return for students 2011 Expenses Employee business, Employee Business Expenses Moving, Moving Expenses Extension of deadlines, Extension of Deadlines Extension of time to file, Extensions F Family, Adopted child. Tax return for students 2011 (see also Child tax credit) Filing returns, Filing Returns First-time homebuyer credit, First-Time Homebuyer Credit Foreclosures Mortgage settlement payouts, Foreclosures Foreign income, Foreign Source Income Foreign moves, Foreign Moves Forms 1040, Foreign Moves, Itemized Deductions, Where To File 1040A, Where To File 1040EZ, Where To File 1040NR, Nonresident Aliens 2106, Employee Business Expenses, Reimbursement. Tax return for students 2011 2106-EZ, Employee Business Expenses 2848, Signing Returns, Spouse overseas. Tax return for students 2011 3903, Moving Expenses 4868, Extensions W-2, Form W-2 Codes, Form W-2. Tax return for students 2011 , Nontaxable combat pay election. Tax return for students 2011 Foster care Child tax credit, Qualifying Child Free tax services, Free help with your tax return. Tax return for students 2011 G Gross income, Gross Income H Help (see Tax help) Home Away from, Away from home. Tax return for students 2011 Definition of, Away from home. Tax return for students 2011 Sale of, Sale of Home Homebuyer credit, First-Time Homebuyer Credit Hospitalization, Hospitalized While Serving in a Combat Zone, Hospitalized After Leaving a Combat Zone, Qualified hospitalization. Tax return for students 2011 I Income Foreign source, Foreign Source Income Gross, Gross Income Individual retirement arrangements, Individual Retirement Arrangements Installment agreement Payment deferment, Request for deferment. Tax return for students 2011 Interest rate (maximum), Maximum Rate of Interest Iraq, Arabian peninsula. Tax return for students 2011 Itemized deductions, Itemized Deductions J Joint returns, Joint returns. Tax return for students 2011 , Joint returns. Tax return for students 2011 , Joint returns. Tax return for students 2011 K Kosovo, The Kosovo area. Tax return for students 2011 M Military action related forgiveness, Terrorist or Military Action Related Forgiveness Military Spouses Residency Relief Act Domicile, Military Spouses Residency Relief Act (MSRRA) Miscellaneous itemized deductions, Employee Business Expenses Missing status, Missing status. Tax return for students 2011 , Spouse in missing status. Tax return for students 2011 , Missing status. Tax return for students 2011 Modified adjusted gross income (MAGI) Child tax credit limits, Modified AGI. Tax return for students 2011 Moving expenses, Moving Expenses N Nonresident aliens, Nonresident Aliens P Permanent change of station, Permanent change of station. Tax return for students 2011 Personal representative, Forgiveness of Decedent's Tax Liability Power of attorney, Signing Returns Professional dues, Professional Dues Publications (see Tax help) Q Qualifying child, Qualifying child. Tax return for students 2011 R Reimbursements Employee business expenses, Reimbursement. Tax return for students 2011 Moving and storage, Services or reimbursements provided by the government. Tax return for students 2011 Uniforms, Uniforms Reservists, Armed Forces reservists. Tax return for students 2011 Travel, Armed Forces Reservists Uniforms, Uniforms Resident aliens, Resident Aliens Returns Filing, Filing Returns Signing, Signing Returns S Sale of home, Sale of Home Same-sex marriage, Same-Sex Marriage SCRA violation payouts, Foreclosures Separate returns, Separate returns. Tax return for students 2011 Servicemembers Civil Relief Act, Maximum Rate of Interest Serving in a combat zone, Serving in a Combat Zone Social security numbers (SSNs) Earned income credit, Residency test. Tax return for students 2011 Spouse Deadline extension, Spouses. Tax return for students 2011 Died, Spouse died during the year. Tax return for students 2011 Incapacitated, Spouse incapacitated. Tax return for students 2011 Missing, Spouse in missing status. Tax return for students 2011 Nonresident alien, Treating nonresident alien spouse as resident alien. Tax return for students 2011 Overseas, Spouse overseas. Tax return for students 2011 State bonus payments, State bonus payments. Tax return for students 2011 T Tax forgiven, Combat Zone Related Forgiveness Tax help, How To Get Tax Help Temporary work location, Temporary work location. Tax return for students 2011 Terrorist related forgiveness, Terrorist or Military Action Related Forgiveness Transportation, Armed Forces reservists. Tax return for students 2011 Transportation expenses, Transportation Expenses Travel expenses, Travel Expenses TTY/TDD information, How To Get Tax Help U Uniforms, Uniforms W When to file, When To File Where to file, Where To File Y Yugoslavia, The Kosovo area. Tax return for students 2011 Prev  Up     Home   More Online Publications
 
Print - Click this link to Print this page

Subscribe to IRS Tax Tips

Subscribe to Tax Tips to get easy-to-read tips about taxes via e-mail from the IRS. Tips are issued each business day during the tax-filing season and and three times a week in the summertime. Special Edition Tax Tips are issued periodically throughout the year to highlight important topics of interest to the public.

Tax Tips are brief, to the point and cover a wide-range of topics, including:

  • Common errors to avoid when you prepare your tax return
  • Where you can get free tax help
  • Guidance on available tax deductions and credits
  • How e-file can make filing easier, get you your refund faster and protect your payments
  • How to file for an extension or amend your return

Subscribe / Unsubscribe

 

 

Page Last Reviewed or Updated: 24-Mar-2014

The Tax Return For Students 2011

Tax return for students 2011 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. Tax return for students 2011 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. Tax return for students 2011 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. Tax return for students 2011 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. Tax return for students 2011 However, a joint undertaking merely to share expenses is not a partnership. Tax return for students 2011 For example, co-ownership of property maintained and rented or leased is not a partnership unless the co-owners provide services to the tenants. Tax return for students 2011 The rules you must use to determine whether an organization is classified as a partnership changed for organizations formed after 1996. Tax return for students 2011 Organizations formed after 1996. Tax return for students 2011   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. Tax return for students 2011 An organization formed under a federal or state law that refers to it as incorporated or as a corporation, body corporate, or body politic. Tax return for students 2011 An organization formed under a state law that refers to it as a joint-stock company or joint-stock association. Tax return for students 2011 An insurance company. Tax return for students 2011 Certain banks. Tax return for students 2011 An organization wholly owned by a state, local, or foreign government. Tax return for students 2011 An organization specifically required to be taxed as a corporation by the Internal Revenue Code (for example, certain publicly traded partnerships). Tax return for students 2011 Certain foreign organizations identified in section 301. Tax return for students 2011 7701-2(b)(8) of the regulations. Tax return for students 2011 A tax-exempt organization. Tax return for students 2011 A real estate investment trust. Tax return for students 2011 An organization classified as a trust under section 301. Tax return for students 2011 7701-4 of the regulations or otherwise subject to special treatment under the Internal Revenue Code. Tax return for students 2011 Any other organization that elects to be classified as a corporation by filing Form 8832. Tax return for students 2011 For more information, see the instructions for Form 8832. Tax return for students 2011 Limited liability company. Tax return for students 2011   A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC. Tax return for students 2011 Unlike a partnership, none of the members of an LLC are personally liable for its debts. Tax return for students 2011 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. Tax return for students 2011 7701-3. Tax return for students 2011 See Form 8832 and section 301. Tax return for students 2011 7701-3 of the regulations for more details. Tax return for students 2011 A domestic LLC with at least two members that does not file Form 8832 is classified as a partnership for federal income tax purposes. Tax return for students 2011 Organizations formed before 1997. Tax return for students 2011   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. Tax return for students 2011 Community property. Tax return for students 2011    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. Tax return for students 2011 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. Tax return for students 2011 A change in reporting position will be treated for federal tax purposes as a conversion of the entity. Tax return for students 2011   A qualified entity is a business entity that meets all the following requirements. Tax return for students 2011 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. Tax return for students 2011 No person other than one or both spouses would be considered an owner for federal tax purposes. Tax return for students 2011 The business entity is not treated as a corporation. Tax return for students 2011   For more information about community property, see Publication 555, Community Property. Tax return for students 2011 Publication 555 discusses the community property laws of Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Tax return for students 2011 Family Partnership Members of a family can be partners. Tax return for students 2011 However, family members (or any other person) will be recognized as partners only if one of the following requirements is met. Tax return for students 2011 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. Tax return for students 2011 If capital is not a material income-producing factor, they joined together in good faith to conduct a business. Tax return for students 2011 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. Tax return for students 2011 Capital is material. Tax return for students 2011   Capital is a material income-producing factor if a substantial part of the gross income of the business comes from the use of capital. Tax return for students 2011 Capital is ordinarily an income-producing factor if the operation of the business requires substantial inventories or investments in plants, machinery, or equipment. Tax return for students 2011 Capital is not material. Tax return for students 2011   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. Tax return for students 2011 Capital interest. Tax return for students 2011   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. Tax return for students 2011 The owner withdraws from the partnership. Tax return for students 2011 The partnership liquidates. Tax return for students 2011   The mere right to share in earnings and profits is not a capital interest in the partnership. Tax return for students 2011 Gift of capital interest. Tax return for students 2011   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. Tax return for students 2011 It must be figured by reducing the partnership income by reasonable compensation for services the donor renders to the partnership. Tax return for students 2011 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. Tax return for students 2011 Purchase. Tax return for students 2011   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. Tax return for students 2011 The fair market value of the purchased interest is considered donated capital. Tax return for students 2011 For this purpose, members of a family include only spouses, ancestors, and lineal descendants (or a trust for the primary benefit of those persons). Tax return for students 2011 Example. Tax return for students 2011 A father sold 50% of his business to his son. Tax return for students 2011 The resulting partnership had a profit of $60,000. Tax return for students 2011 Capital is a material income-producing factor. Tax return for students 2011 The father performed services worth $24,000, which is reasonable compensation, and the son performed no services. Tax return for students 2011 The $24,000 must be allocated to the father as compensation. Tax return for students 2011 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. Tax return for students 2011 The son's share of partnership profit cannot be more than $18,000. Tax return for students 2011 Business owned and operated by spouses. Tax return for students 2011   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. Tax return for students 2011 If so, they should report income or loss from the business on Form 1065. Tax return for students 2011 They should not report the income on a Schedule C (Form 1040) in the name of one spouse as a sole proprietor. Tax return for students 2011 However, the spouses can elect not to treat the joint venture as a partnership by making a Qualified Joint Venture Election. Tax return for students 2011 Qualified Joint Venture Election. Tax return for students 2011   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. Tax return for students 2011 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. Tax return for students 2011   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. Tax return for students 2011 All items of income, gain, deduction, loss, and credit are divided between the spouses based on their respective interests in the venture. Tax return for students 2011 Each spouse takes into account his or her respective share of these items as a sole proprietor. Tax return for students 2011 Each spouse would account for his or her respective share on the appropriate form, such as Schedule C (Form 1040). Tax return for students 2011 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. Tax return for students 2011 e. Tax return for students 2011 , based on their respective interests in the venture). Tax return for students 2011   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. Tax return for students 2011 Each spouse should include his or her respective share of self-employment income on a separate Schedule SE (Form 1040), Self-Employment Tax. Tax return for students 2011   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. Tax return for students 2011 However, this may not be true if either spouse exceeds the social security tax limitation. Tax return for students 2011   For more information on qualified joint ventures, go to IRS. Tax return for students 2011 gov, enter “Election for Qualified Joint Ventures” in the search box and select the link reading “Election for Husband and Wife Unincorporated Businesses. Tax return for students 2011 ” Partnership Agreement The partnership agreement includes the original agreement and any modifications. Tax return for students 2011 The modifications must be agreed to by all partners or adopted in any other manner provided by the partnership agreement. Tax return for students 2011 The agreement or modifications can be oral or written. Tax return for students 2011 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. Tax return for students 2011 This filing date does not include any extension of time. Tax return for students 2011 If the partnership agreement or any modification is silent on any matter, the provisions of local law are treated as part of the agreement. Tax return for students 2011 Terminating a Partnership A partnership terminates when one of the following events takes place. Tax return for students 2011 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. Tax return for students 2011 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. Tax return for students 2011 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. Tax return for students 2011 See section 1. Tax return for students 2011 708-1(b) of the regulations for more information on the termination of a partnership. Tax return for students 2011 For special rules that apply to a merger, consolidation, or division of a partnership, see sections 1. Tax return for students 2011 708-1(c) and 1. Tax return for students 2011 708-1(d) of the regulations. Tax return for students 2011 Date of termination. Tax return for students 2011   The partnership's tax year ends on the date of termination. Tax return for students 2011 For the event described in (1), above, the date of termination is the date the partnership completes the winding up of its affairs. Tax return for students 2011 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. Tax return for students 2011 Short period return. Tax return for students 2011   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. Tax return for students 2011 The return is due the 15th day of the fourth month following the date of termination. Tax return for students 2011 See Partnership Return (Form 1065), later, for information about filing Form 1065. Tax return for students 2011 Conversion of partnership into limited liability company (LLC). Tax return for students 2011   The conversion of a partnership into an LLC classified as a partnership for federal tax purposes does not terminate the partnership. Tax return for students 2011 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. Tax return for students 2011   However, the conversion may change some of the partners' bases in their partnership interests if the partnership has recourse liabilities that become nonrecourse liabilities. Tax return for students 2011 Because the partners share recourse and nonrecourse liabilities differently, their bases must be adjusted to reflect the new sharing ratios. Tax return for students 2011 If a decrease in a partner's share of liabilities exceeds the partner's basis, he or she must recognize gain on the excess. Tax return for students 2011 For more information, see Effect of Partnership Liabilities under Basis of Partner's Interest, later. Tax return for students 2011   The same rules apply if an LLC classified as a partnership is converted into a partnership. Tax return for students 2011 IRS e-file (Electronic Filing) Please click here for the text description of the image. Tax return for students 2011 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). Tax return for students 2011 Other partnerships generally have the option to file electronically. Tax return for students 2011 For details about IRS e-file, see the Form 1065 instructions. Tax return for students 2011 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. Tax return for students 2011 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. Tax return for students 2011 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. Tax return for students 2011 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. Tax return for students 2011 Investing partnership. Tax return for students 2011   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. Tax return for students 2011 They own the property as co-owners. Tax return for students 2011 They reserve the right separately to take or dispose of their shares of any property acquired or retained. Tax return for students 2011 They do not actively conduct business or irrevocably authorize some person acting in a representative capacity to purchase, sell, or exchange the investment property. Tax return for students 2011 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. Tax return for students 2011 Operating agreement partnership. Tax return for students 2011   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. Tax return for students 2011 They own the property as co-owners, either in fee or under lease or other form of contract granting exclusive operating rights. Tax return for students 2011 They reserve the right separately to take in kind or dispose of their shares of any property produced, extracted, or used. Tax return for students 2011 They do not jointly sell services or the property produced or extracted. Tax return for students 2011 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. Tax return for students 2011 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. Tax return for students 2011 Electing the exclusion. Tax return for students 2011   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. Tax return for students 2011 This filing date includes any extension of time. Tax return for students 2011 See Regulations section 1. Tax return for students 2011 761-2(b) for the procedures to follow. Tax return for students 2011 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. Tax return for students 2011 The partnership return must show the names and addresses of each partner and each partner's distributive share of taxable income. Tax return for students 2011 The return must be signed by a general partner. Tax return for students 2011 If a limited liability company is treated as a partnership, it must file Form 1065 and one of its members must sign the return. Tax return for students 2011 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. Tax return for students 2011 See the Instructions for Form 1065 for more information about who must file Form 1065. Tax return for students 2011 Partnership Distributions Partnership distributions include the following. Tax return for students 2011 A withdrawal by a partner in anticipation of the current year's earnings. Tax return for students 2011 A distribution of the current year's or prior years' earnings not needed for working capital. Tax return for students 2011 A complete or partial liquidation of a partner's interest. Tax return for students 2011 A distribution to all partners in a complete liquidation of the partnership. Tax return for students 2011 A partnership distribution is not taken into account in determining the partner's distributive share of partnership income or loss. Tax return for students 2011 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. Tax return for students 2011 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. Tax return for students 2011 Effect on partner's basis. Tax return for students 2011   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. Tax return for students 2011 See Adjusted Basis under Basis of Partner's Interest, later. Tax return for students 2011 Effect on partnership. Tax return for students 2011   A partnership generally does not recognize any gain or loss because of distributions it makes to partners. Tax return for students 2011 The partnership may be able to elect to adjust the basis of its undistributed property. Tax return for students 2011 Certain distributions treated as a sale or exchange. Tax return for students 2011   When a partnership distributes the following items, the distribution may be treated as a sale or exchange of property rather than a distribution. Tax return for students 2011 Unrealized receivables or substantially appreciated inventory items distributed in exchange for any part of the partner's interest in other partnership property, including money. Tax return for students 2011 Other property (including money) distributed in exchange for any part of a partner's interest in unrealized receivables or substantially appreciated inventory items. Tax return for students 2011   See Payments for Unrealized Receivables and Inventory Items under Disposition of Partner's Interest, later. Tax return for students 2011   This treatment does not apply to the following distributions. Tax return for students 2011 A distribution of property to the partner who contributed the property to the partnership. Tax return for students 2011 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. Tax return for students 2011 Substantially appreciated inventory items. Tax return for students 2011   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. Tax return for students 2011 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. Tax return for students 2011 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. Tax return for students 2011 Any gain recognized is generally treated as capital gain from the sale of the partnership interest on the date of the distribution. Tax return for students 2011 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. Tax return for students 2011 For exceptions to these rules, see Distribution of partner's debt and Net precontribution gain, later. Tax return for students 2011 Also, see Payments for Unrealized Receivables and Inventory Items under Disposition of Partner's Interest, later. Tax return for students 2011 Example. Tax return for students 2011 The adjusted basis of Jo's partnership interest is $14,000. Tax return for students 2011 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. Tax return for students 2011 Because the cash received does not exceed the basis of her partnership interest, Jo does not recognize any gain on the distribution. Tax return for students 2011 Any gain on the land will be recognized when she sells or otherwise disposes of it. Tax return for students 2011 The distribution decreases the adjusted basis of Jo's partnership interest to $4,000 [$14,000 − ($8,000 + $2,000)]. Tax return for students 2011 Marketable securities treated as money. Tax return for students 2011   Generally, a marketable security distributed to a partner is treated as money in determining whether gain is recognized on the distribution. Tax return for students 2011 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. Tax return for students 2011   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). Tax return for students 2011   For more information, including the definition of marketable securities, see section 731(c) of the Internal Revenue Code. Tax return for students 2011 Loss on distribution. Tax return for students 2011   A partner does not recognize loss on a partnership distribution unless all the following requirements are met. Tax return for students 2011 The adjusted basis of the partner's interest in the partnership exceeds the distribution. Tax return for students 2011 The partner's entire interest in the partnership is liquidated. Tax return for students 2011 The distribution is in money, unrealized receivables, or inventory items. Tax return for students 2011   There are exceptions to these general rules. Tax return for students 2011 See the following discussions. Tax return for students 2011 Also, see Liquidation at Partner's Retirement or Death under Disposition of Partner's Interest, later. Tax return for students 2011 Distribution of partner's debt. Tax return for students 2011   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). Tax return for students 2011   The partner is treated as having satisfied the debt for its fair market value. Tax return for students 2011 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. Tax return for students 2011   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. Tax return for students 2011 Net precontribution gain. Tax return for students 2011   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. Tax return for students 2011   The gain recognized is the lesser of the following amounts. Tax return for students 2011 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. Tax return for students 2011 The “net precontribution gain” of the partner. Tax return for students 2011 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. Tax return for students 2011 For information about the distribution of contributed property to another partner, see Contribution of Property , under Transactions Between Partnership and Partners, later. Tax return for students 2011   The character of the gain is determined by reference to the character of the net precontribution gain. Tax return for students 2011 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. Tax return for students 2011 For these rules, the term “money” includes marketable securities treated as money, as discussed earlier. Tax return for students 2011 Effect on basis. Tax return for students 2011   The adjusted basis of the partner's interest in the partnership is increased by any net precontribution gain recognized by the partner. Tax return for students 2011 Other than for purposes of determining the gain, the increase is treated as occurring immediately before the distribution. Tax return for students 2011 See Basis of Partner's Interest , later. Tax return for students 2011   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. Tax return for students 2011 Exceptions. Tax return for students 2011   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. Tax return for students 2011 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. Tax return for students 2011   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. Tax return for students 2011 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. Tax return for students 2011 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. Tax return for students 2011 Example 1. Tax return for students 2011 The adjusted basis of Emily's partnership interest is $30,000. Tax return for students 2011 She receives a distribution of property that has an adjusted basis of $20,000 to the partnership and $4,000 in cash. Tax return for students 2011 Her basis for the property is $20,000. Tax return for students 2011 Example 2. Tax return for students 2011 The adjusted basis of Steve's partnership interest is $10,000. Tax return for students 2011 He receives a distribution of $4,000 cash and property that has an adjusted basis to the partnership of $8,000. Tax return for students 2011 His basis for the distributed property is limited to $6,000 ($10,000 − $4,000, the cash he receives). Tax return for students 2011 Complete liquidation of partner's interest. Tax return for students 2011   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. Tax return for students 2011 Partner's holding period. Tax return for students 2011   A partner's holding period for property distributed to the partner includes the period the property was held by the partnership. Tax return for students 2011 If the property was contributed to the partnership by a partner, then the period it was held by that partner is also included. Tax return for students 2011 Basis divided among properties. Tax return for students 2011   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. Tax return for students 2011 For property distributed after August 5, 1997, allocate the basis using the following rules. Tax return for students 2011 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. Tax return for students 2011 If the total of these assigned bases exceeds the allocable basis, decrease the assigned bases by the amount of the excess. Tax return for students 2011 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. Tax return for students 2011 If the allocable basis exceeds the total of these assigned bases, increase the assigned bases by the amount of the excess. Tax return for students 2011 If the total of these assigned bases exceeds the allocable basis, decrease the assigned bases by the amount of the excess. Tax return for students 2011 Allocating a basis increase. Tax return for students 2011   Allocate any basis increase required in rule (2), above, first to properties with unrealized appreciation to the extent of the unrealized appreciation. Tax return for students 2011 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. Tax return for students 2011 Allocate any remaining basis increase among all the properties in proportion to their respective fair market values. Tax return for students 2011 Example. Tax return for students 2011 Eun's basis in her partnership interest is $55,000. Tax return for students 2011 In a distribution in liquidation of her entire interest, she receives properties A and B, neither of which is inventory or unrealized receivables. Tax return for students 2011 Property A has an adjusted basis to the partnership of $5,000 and a fair market value of $40,000. Tax return for students 2011 Property B has an adjusted basis to the partnership of $10,000 and a fair market value of $10,000. Tax return for students 2011 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). Tax return for students 2011 This leaves a $40,000 basis increase (the $55,000 allocable basis minus the $15,000 total of the assigned bases). Tax return for students 2011 She first allocates $35,000 to property A (its unrealized appreciation). Tax return for students 2011 The remaining $5,000 is allocated between the properties based on their fair market values. Tax return for students 2011 $4,000 ($40,000/$50,000) is allocated to property A and $1,000 ($10,000/$50,000) is allocated to property B. Tax return for students 2011 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). Tax return for students 2011 Allocating a basis decrease. Tax return for students 2011   Use the following rules to allocate any basis decrease required in rule (1) or rule (2), earlier. Tax return for students 2011 Allocate the basis decrease first to items with unrealized depreciation to the extent of the unrealized depreciation. Tax return for students 2011 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. Tax return for students 2011 Allocate any remaining basis decrease among all the items in proportion to their respective assigned basis amounts (as decreased in (1)). Tax return for students 2011 Example. Tax return for students 2011 Armando's basis in his partnership interest is $20,000. Tax return for students 2011 In a distribution in liquidation of his entire interest, he receives properties C and D, neither of which is inventory or unrealized receivables. Tax return for students 2011 Property C has an adjusted basis to the partnership of $15,000 and a fair market value of $15,000. Tax return for students 2011 Property D has an adjusted basis to the partnership of $15,000 and a fair market value of $5,000. Tax return for students 2011 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). Tax return for students 2011 This leaves a $10,000 basis decrease (the $30,000 total of the assigned bases minus the $20,000 allocable basis). Tax return for students 2011 He allocates the entire $10,000 to property D (its unrealized depreciation). Tax return for students 2011 Armando's basis in property C is $15,000 and his basis in property D is $5,000 ($15,000 − $10,000). Tax return for students 2011 Distributions before August 6, 1997. Tax return for students 2011   For property distributed before August 6, 1997, allocate the basis using the following rules. Tax return for students 2011 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. Tax return for students 2011 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. Tax return for students 2011 Allocate any remaining basis to other distributed properties in proportion to their adjusted bases to the partnership. Tax return for students 2011 Partner's interest more than partnership basis. Tax return for students 2011   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. Tax return for students 2011 Special adjustment to basis. Tax return for students 2011   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. Tax return for students 2011 To choose the special adjustment, the partner must have received the distribution within 2 years after acquiring the partnership interest. Tax return for students 2011 Also, the partnership must not have chosen the optional adjustment to basis when the partner acquired the partnership interest. Tax return for students 2011   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. Tax return for students 2011 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. Tax return for students 2011   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. Tax return for students 2011 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. Tax return for students 2011   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. Tax return for students 2011 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. Tax return for students 2011 Example. Tax return for students 2011 Chin Ho purchased a 25% interest in X partnership for $17,000 cash. Tax return for students 2011 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. Tax return for students 2011 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. Tax return for students 2011 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. Tax return for students 2011 The value of the inventory received was 25% of the value of all partnership inventory. Tax return for students 2011 (It is immaterial whether the inventory he received was on hand when he acquired his interest. Tax return for students 2011 ) 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. Tax return for students 2011 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). Tax return for students 2011 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. Tax return for students 2011 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). Tax return for students 2011 His basis in the inventory items is $4,000 ($3,500 partnership basis + $500 special adjustment). Tax return for students 2011 The remaining $11,500 is allocated to his new basis for the other property he received. Tax return for students 2011 Mandatory adjustment. Tax return for students 2011   A partner does not always have a choice of making this special adjustment to basis. Tax return for students 2011 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. Tax return for students 2011 The fair market value of all partnership property (other than money) was more than 110% of its adjusted basis to the partnership. Tax return for students 2011 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. Tax return for students 2011 The optional basis adjustment, if it had been chosen by the partnership, would have changed the partner's basis for the property actually distributed. Tax return for students 2011 Required statement. Tax return for students 2011   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. Tax return for students 2011 The statement must provide information necessary for the partner to compute the special basis adjustment. Tax return for students 2011 Marketable securities. Tax return for students 2011   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. Tax return for students 2011 See Marketable securities treated as money under Partner's Gain or Loss, earlier. Tax return for students 2011 The basis increase is allocated among the securities in proportion to their respective amounts of unrealized appreciation before the basis increase. Tax return for students 2011 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. Tax return for students 2011 These transactions include the following. Tax return for students 2011 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. Tax return for students 2011 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. Tax return for students 2011 Payments by accrual basis partnership to cash basis partner. Tax return for students 2011   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. Tax return for students 2011 However, this rule does not apply to guaranteed payments made to a partner, which are generally deductible when accrued. Tax return for students 2011 Guaranteed Payments Guaranteed payments are those made by a partnership to a partner that are determined without regard to the partnership's income. Tax return for students 2011 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. Tax return for students 2011 This treatment is for purposes of determining gross income and deductible business expenses only. Tax return for students 2011 For other tax purposes, guaranteed payments are treated as a partner's distributive share of ordinary income. Tax return for students 2011 Guaranteed payments are not subject to income tax withholding. Tax return for students 2011 The partnership generally deducts guaranteed payments on line 10 of Form 1065 as a business expense. Tax return for students 2011 They are also listed on Schedules K and K-1 of the partnership return. Tax return for students 2011 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. Tax return for students 2011 Guaranteed payments made to partners for organizing the partnership or syndicating interests in the partnership are capital expenses. Tax return for students 2011 Generally, organizational and syndication expenses are not deductible by the partnership. Tax return for students 2011 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). Tax return for students 2011 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. Tax return for students 2011 Minimum payment. Tax return for students 2011   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. Tax return for students 2011 Example. Tax return for students 2011 Under a partnership agreement, Divya is to receive 30% of the partnership income, but not less than $8,000. Tax return for students 2011 The partnership has net income of $20,000. Tax return for students 2011 Divya's share, without regard to the minimum guarantee, is $6,000 (30% × $20,000). Tax return for students 2011 The guaranteed payment that can be deducted by the partnership is $2,000 ($8,000 − $6,000). Tax return for students 2011 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. Tax return for students 2011 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. Tax return for students 2011 Self-employed health insurance premiums. Tax return for students 2011   Premiums for health insurance paid by a partnership on behalf of a partner, for services as a partner, are treated as guaranteed payments. Tax return for students 2011 The partnership can deduct the payments as a business expense, and the partner must include them in gross income. Tax return for students 2011 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. Tax return for students 2011   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. Tax return for students 2011 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. Tax return for students 2011 For more information on the self-employed health insurance deduction, see chapter 6 in Publication 535. Tax return for students 2011 Including payments in partner's income. Tax return for students 2011   Guaranteed payments are included in income in the partner's tax year in which the partnership's tax year ends. Tax return for students 2011 Example 1. Tax return for students 2011 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. Tax return for students 2011 Her distributive share of the partnership income is 10%. Tax return for students 2011 The partnership has $50,000 of ordinary income after deducting the guaranteed payment. Tax return for students 2011 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. Tax return for students 2011 Example 2. Tax return for students 2011 Lamont is a calendar year taxpayer who is a partner in a partnership. Tax return for students 2011 The partnership uses a fiscal year that ended January 31, 2013. Tax return for students 2011 Lamont received guaranteed payments from the partnership from February 1, 2012, until December 31, 2012. Tax return for students 2011 He must include these guaranteed payments in income for 2013 and report them on his 2013 income tax return. Tax return for students 2011 Payments resulting in loss. Tax return for students 2011   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. Tax return for students 2011 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. Tax return for students 2011 Sale or Exchange of Property Special rules apply to a sale or exchange of property between a partnership and certain persons. Tax return for students 2011 Losses. Tax return for students 2011   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%. Tax return for students 2011   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. Tax return for students 2011   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. Tax return for students 2011   If the purchaser later sells the property, only the gain realized that is greater than the loss not allowed will be taxable. Tax return for students 2011 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. Tax return for students 2011 Gains. Tax return for students 2011   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. Tax return for students 2011 More than 50% of the capital or profits interest in the partnership(s) is directly or indirectly owned by the same person(s). Tax return for students 2011 The property in the hands of the transferee immediately after the transfer is not a capital asset. Tax return for students 2011 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. Tax return for students 2011 More than 50% ownership. Tax return for students 2011   To determine if there is more than 50% ownership in partnership capital or profits, the following rules apply. Tax return for students 2011 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. Tax return for students 2011 An individual is considered to own the interest directly or indirectly owned by, or for, the individual's family. Tax return for students 2011 For this rule, “family” includes only brothers, sisters, half-brothers, half-sisters, spouses, ancestors, and lineal descendants. Tax return for students 2011 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. Tax return for students 2011 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. Tax return for students 2011 Example. Tax return for students 2011 Individuals A and B and Trust T are equal partners in Partnership ABT. Tax return for students 2011 A's husband, AH, is the sole beneficiary of Trust T. Tax return for students 2011 Trust T's partnership interest will be attributed to AH only for the purpose of further attributing the interest to A. Tax return for students 2011 As a result, A is a more-than-50% partner. Tax return for students 2011 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. Tax return for students 2011 More information. Tax return for students 2011   For more information on these special rules, see Sales and Exchanges Between Related Persons in chapter 2 of Publication 544. Tax return for students 2011 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. Tax return for students 2011 This applies whether a partnership is being formed or is already operating. Tax return for students 2011 The partnership's holding period for the property includes the partner's holding period. Tax return for students 2011 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. Tax return for students 2011 The exchange is not subject to the rules explained later under Disposition of Partner's Interest. Tax return for students 2011 Disguised sales. Tax return for students 2011   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. Tax return for students 2011 The distribution would not have been made but for the contribution. Tax return for students 2011 The partner's right to the distribution does not depend on the success of partnership operations. Tax return for students 2011   All facts and circumstances are considered in determining if the contribution and distribution are more properly characterized as a sale. Tax return for students 2011 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. Tax return for students 2011 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. Tax return for students 2011 Form 8275 required. Tax return for students 2011   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. Tax return for students 2011 For exceptions to this requirement, see section 1. Tax return for students 2011 707-3(c)(2) of the regulations. Tax return for students 2011   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. Tax return for students 2011   Form 8275 must include the following information. Tax return for students 2011 A caption identifying the statement as a disclosure under section 707 of the Internal Revenue Code. Tax return for students 2011 A description of the transferred property or money, including its value. Tax return for students 2011 A description of any relevant facts in determining if the transfers are properly viewed as a disguised sale. Tax return for students 2011 See section 1. Tax return for students 2011 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. Tax return for students 2011 Contribution to partnership treated as investment company. Tax return for students 2011   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. Tax return for students 2011   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. Tax return for students 2011 These items include money, stocks and other equity interests in a corporation, and interests in regulated investment companies and real estate investment trusts. Tax return for students 2011 For more information, see section 351(e)(1) of the Internal Revenue Code and the related regulations. Tax return for students 2011 Whether a partnership is treated as an investment company under this test is ordinarily determined immediately after the transfer of property. Tax return for students 2011   This rule applies to limited partnerships and general partnerships, regardless of whether they are privately formed or publicly syndicated. Tax return for students 2011 Contribution to foreign partnership. Tax return for students 2011   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. Tax return for students 2011 Immediately after the contribution, the partnership owned, directly or indirectly, at least a 10% interest in the foreign partnership. Tax return for students 2011 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. Tax return for students 2011   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. Tax return for students 2011 See the form instructions for more information. Tax return for students 2011 Basis of contributed property. Tax return for students 2011   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. Tax return for students 2011 Allocations to account for built-in gain or loss. Tax return for students 2011   The fair market value of property at the time it is contributed may be different from the partner's adjusted basis. Tax return for students 2011 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. Tax return for students 2011 This rule also applies to contributions of accounts payable and other accrued but unpaid items of a cash basis partner. Tax return for students 2011   The partnership can use different allocation methods for different items of contributed property. Tax return for students 2011 A single reasonable method must be consistently applied to each item, and the overall method or combination of methods must be reasonable. Tax return for students 2011 See section 1. Tax return for students 2011 704-3 of the regulations for allocation methods generally considered reasonable. Tax return for students 2011   If the partnership sells contributed property and recognizes gain or loss, built-in gain or loss is allocated to the contributing partner. Tax return for students 2011 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. Tax return for students 2011 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. Tax return for students 2011 Example. Tax return for students 2011 Areta and Sofia formed an equal partnership. Tax return for students 2011 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. Tax return for students 2011 The partnership's basis for depreciation is limited to the adjusted basis of the property in Sofia's hands, $4,000. Tax return for students 2011 In effect, Areta purchased an undivided one-half interest in the depreciable property with her contribution of $10,000. Tax return for students 2011 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. Tax return for students 2011 To simplify this example, the depreciation deductions are determined without regard to any first-year depreciation conventions. Tax return for students 2011 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. Tax return for students 2011 The entire $400 must be allocated to Areta. Tax return for students 2011 Distribution of contributed property to another partner. Tax return for students 2011   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. Tax return for students 2011   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. Tax return for students 2011 This amount is the difference between the property's basis and its fair market value at the time of contribution. Tax return for students 2011 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. Tax return for students 2011 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. Tax return for students 2011 Disposition of certain contributed property. Tax return for students 2011   The following rules determine the character of the partnership's gain or loss on a disposition of certain types of contributed property. Tax return for students 2011 Unrealized receivables. Tax return for students 2011 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. Tax return for students 2011 Unrealized receivables are defined later under Payments for Unrealized Receivables and Inventory Items. Tax return for students 2011 When reading the definition, substitute “partner” for “partnership. Tax return for students 2011 ” Inventory items. Tax return for students 2011 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. Tax return for students 2011 Inventory items are defined later in Payments for Unrealized Receivables and Inventory Items. Tax return for students 2011 Capital loss property. Tax return for students 2011 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. Tax return for students 2011 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. Tax return for students 2011 Substituted basis property. Tax return for students 2011 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. Tax return for students 2011 Contribution of Services A partner can acquire an interest in partnership capital or profits as compensation for services performed or to be performed. Tax return for students 2011 Capital interest. Tax return for students 2011   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. Tax return for students 2011 This determination generally is made at the time of receipt of the partnership interest. Tax return for students 2011 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. Tax return for students 2011 The capital interest transferred as compensation for services is subject to the rules for restricted property discussed in Publication 525 under Employee Compensation. Tax return for students 2011   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. Tax return for students 2011 Profits interest. Tax return for students 2011   A profits interest is a partnership interest other than a capital interest. Tax return for students 2011 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. Tax return for students 2011 However, this does not apply in the following situations. Tax return for students 2011 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. Tax return for students 2011 Within 2 years of receipt, the partner disposes of the profits interest. Tax return for students 2011 The profits interest is a limited partnership interest in a publicly traded partnership. Tax return for students 2011   A profits interest transferred as compensation for services is not subject to the rules for restricted property that apply to capital interests. Tax return for students 2011 Basis of Partner's Interest The basis of a partnership interest is the money plus the adjusted basis of any property the partner contributed. Tax return for students 2011 If the partner must recognize gain as a result of the contribution, this gain is included in the basis of his or her interest. Tax return for students 2011 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. Tax return for students 2011 Interest acquired by gift, etc. Tax return for students 2011   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. Tax return for students 2011 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). Tax return for students 2011 The basis of an interest in a partnership is increased or decreased by certain items. Tax return for students 2011 Increases. Tax return for students 2011   A partner's basis is increased by the following items. Tax return for students 2011 The partner's additional contributions to the partnership, including an increased share of, or assumption of, partnership liabilities. Tax return for students 2011 The partner's distributive share of taxable and nontaxable partnership income. Tax return for students 2011 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. Tax return for students 2011 Decreases. Tax return for students 2011   The partner's basis is decreased (but never below zero) by the following items. Tax return for students 2011 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. Tax return for students 2011 The partner's distributive share of the partnership losses (including capital losses). Tax return for students 2011 The partner's distributive share of nondeductible partnership expenses that are not capital expenditures. Tax return for students 2011 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. Tax return for students 2011 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. Tax return for students 2011 Partner's liabilities assumed by partnership. Tax return for students 2011   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. Tax return for students 2011 This partner must reduce his or her basis because the assumption of the liability is treated as a distribution of money to that partner. Tax return for students 2011 The other partners' assumption of the liability is treated as a contribution by them of money to the partnership. Tax return for students 2011 See Effect of Partnership Liabilities , later. Tax return for students 2011 Example 1. Tax return for students 2011 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. Tax return for students 2011 The partnership assumed payment of the mortgage. Tax return for students 2011 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. Tax return for students 2011 If, in Example 1, the contributed property had a $12,000 mortgage, the basis of Ivan's partnership interest would be zero. Tax return for students 2011 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. Tax return for students 2011 However, this gain would not increase the basis of his partnership interest. Tax return for students 2011 Book value of partner's interest. Tax return for students 2011   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. Tax return for students 2011 Example. Tax return for students 2011 Enzo contributes to his partnership property that has an adjusted basis of $400 and a fair market value of $1,000. Tax return for students 2011 His partner contributes $1,000 cash. Tax return for students 2011 While each partner has increased his capital account by $1,000, which will be re