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    Tax Assignment 3

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    Monis Khan
    Yvonne and Larry plan to start a plant nursery business and operate as a partnership to take advantage of tax benefits like avoiding double taxation, flexibility in allocating profits/losses, and ability to pass losses through to partners. Legal and accounting fees for setting up the partnership can be deducted up to $5,000. The family partnership rules would apply to an interest Roy's father gave him in the Family Partnership if capital is a material income-producing factor. Congress enacted the 20% qualified business income deduction to provide pass-through businesses a tax rate comparable to the 21% corporate tax rate.

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    Tax Assignment 3

    Uploaded by

    Monis Khan
    48 views2 pages
    Yvonne and Larry plan to start a plant nursery business and operate as a partnership to take advantage of tax benefits like avoiding double taxation, flexibility in allocating profits/losses, and ability to pass losses through to partners. Legal and accounting fees for setting up the partnership can be deducted up to $5,000. The family partnership rules would apply to an interest Roy's father gave him in the Family Partnership if capital is a material income-producing factor. Congress enacted the 20% qualified business income deduction to provide pass-through businesses a tax rate comparable to the 21% corporate tax rate.

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    Yvonne and Larry plan to start a plant nursery business and operate as a partnership to take advantage of tax benefits like avoiding double taxation, flexibility in allocating profits/losses, and ability to pass losses through to partners. Legal and accounting fees for setting up the partnership can be deducted up to $5,000. The family partnership rules would apply to an interest Roy's father gave him in the Family Partnership if capital is a material income-producing factor. Congress enacted the 20% qualified business income deduction to provide pass-through businesses a tax rate comparable to the 21% corporate tax rate.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    48 views2 pages

    Tax Assignment 3

    Uploaded by

    Monis Khan
    Yvonne and Larry plan to start a plant nursery business and operate as a partnership to take advantage of tax benefits like avoiding double taxation, flexibility in allocating profits/losses, and ability to pass losses through to partners. Legal and accounting fees for setting up the partnership can be deducted up to $5,000. The family partnership rules would apply to an interest Roy's father gave him in the Family Partnership if capital is a material income-producing factor. Congress enacted the 20% qualified business income deduction to provide pass-through businesses a tax rate comparable to the 21% corporate tax rate.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 2

    Assignment 3

    1. Yvonne and Larry plan to begin a business that will grow plants for sale to retail

    nurseries. They expect to have substantial losses for the first three years of operations while

    they develop their plants and their sales operations. Both Yvonne and Larry have

    substantial interest income, and both expect to work full-time in this new business. List

    three advantages for operating this business as a partnership instead of a C corporation.

    Advantages include

    (1) partnerships are not subject to tax, thereby eliminating the problem of double taxation that

    exists for C corporations,

    (2) partners may divide the partnership's profit or loss among themselves without regard to their

    proportionate capital interests,

    (3) under the conduit principle of taxation, partnership losses and other items receiving special

    tax treatment flow through to the partners.

    2. Which of the following items can be deducted (up to $5,000) and amortized as part of a

    partnership's organizational expenditures?

    A. Legal fees for drawing up the partnership agreement

    B. Accounting fees for establishing an accounting system

    D. Filing fees required under state law in the initial year to conduct business in the state
    3. The BW Partnership reported the following current-year earnings: $30,000 interest from

    tax exempt bonds, $50,000 long-term capital gain, and $100,000 net income from

    operations. Bob saw these numbers and told his partner, Wendy, that the partnership had

    $100,000 of taxable income. Is he correct? Explain your answer.

    Bob is incorrect; the ordinary income for BW is $100,000. The total taxable income for BW

    would be $150,000 (100,000+50,000).

    4. Can recourse debt of a partnership increase the basis of a limited partner's partnership

    interest? Explain

    No, because a limited partner normally has no economic risk for recourse debt.

    5. Roy's father gives him a capital interest in the Family Partnership. Discuss whether Sec.

    704€ family partnership rules apply to this interest.

    The Sec. 704(e) rules apply only to a capital interest in a partnership, where capital is a material

    income-producing factor and where the family member is the true owner of the interest. If capital

    is a material income-producing factor for the partnership, the family partnership rules apply.

    6. Why did Congress enact the 20% qualified business income deduction?

    A tax rate somewhat comparable to the 21% corporate tax rate. Thus, Congress did not want to

    give a tax break to C corporations while not giving a tax break to businesses operating in a pass-

    through form.

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