Andre and Martina decide to form AM Partnership. They will be equal partners. An
ID: 2652468 • Letter: A
Question
Andre and Martina decide to form AM Partnership. They will be equal partners. Andre contributes a building with a $150,000 FMV and a $105,000 adjusted basis to the partnership. The building has a $60,000 mortgage, which the partnership assumes. Martina contributes land with a $70,000 FMV and a $95,000 adjusted basis. Martina will manage the day-to-day activities of the partnership. She will begin to receive a guaranteed payment for her work, starting in the second year of operations, and continuing on as long as she manages the operations of the partnership. Andre and Martina have agreed that the guaranteed payment will be $10,000 per year. What tax issues should Andre, Martina, and the partnership consider with respect to the formation and operation of the partnership? AN EXPANDED EXPLANATION COVERING ALL MAJOR POINTS WILL BE REQUIRED TO EARN ALL POINTS IN THIS QUESTION.
Explanation / Answer
A partnership is a tax-reporting, not tax-paying entity. The partnership reports its income on Form 1065, which is used to allocate the income, deductions, and credits to the partners (who pay the tax). Though classified as a partnership, if the entity has no income, pays no deductions, and qualifies for no credits, a Form 1065. need not be filed. Partnerships with more than 100 partners must file Form 1065. and related Schedules K-1 electronically. The return must be signed by the general partner. The penalty for failure to file a 1065. is $85. per month (12 max) x number of partners.
The conversion of a partnership to a limited liability company (LLC) is notconsidered to be a liquidation of the old partnership or the formation of a new partnership entity; the LLC will continue the partnership’s tax year and ID number.