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Add Joint Partnership Agreement Template initials

hey tax students this is your teacher Roy with a video lecture for chapter number 10 this is part one there's going to be a part two and maybe a part three to this chapter ten video lecture here you can see the title of the chapter is called partnership taxation which is somewhat misleading because partnerships do not pay any income taxes the reason for that is the owners of the partnership or the partners have to report on their own probably individually term their share of the business partnership income and pay taxes on that income on their own individual return let's um compare that to what we have learned probably back in Chapter three so if you remember back in Chapter three we learned about a type of business entity called a sole or single proprietorship we where we have just one owner owning the whole business this business could have lots of employees working for the sole proprietorship but the owner him/herself cannot be treated as an employee of his or her own sole proprietorship and whatever income and expenses are incurred by the sole proprietor that profit by the sole proprietorship now has to be reported on the sole proprietors individual income tax return so let's say that here is that sole proprietor and they're gonna file a Form 1040 and what we had done back in Chapter three is prepare a Schedule C calculating out this profit or loss and then reporting that profit or loss on the individuals 1040 form being taxed with the other income of the taxpayer on the other hand next chapter that's chapter 11 we're gonna learn up a business entity called a corporation an entity is just a formation of how you can run your business so in Chapter 11 we'll have a corporation also with income and deductions to calculate out its profit or loss and they're gonna report that and we'll see when we prepare a form called 1120 and then we calculate the tax the income tax for the corporation and now they have to pay it over over to the government okay so this tax here where as again the sole proprietorship does not report does not pay directly any taxes to the government it's the owner here paying taxes to the government income taxes now of course corporations have to have owners and we call them shareholders at least one maybe two maybe thousands and now if the shareholder wants to also profit from the corporation if the cooperation has excess profits maybe they're going to be distributing that as dividends and we saw the taxation of dividends last semester in accounting 134 probably qualified dividends get taxed at lower rates but now those dividends also get taxed or that profit gets taxed to the shareholders and now the shareholders has to pay tax on that same profit that was already taxed to the corporation so sometimes we call this two layers of taxes double taxation this is a disadvantage of running your business through a corporation whereas the case of a sole proprietorship there is no income tax here at the business level but all of it being taxed just one time at the owner so proprietor level now a non tax advantage of a corporation that the sole proprietor doesn't have is that the owners appear their shareholders are shielded from any business liability incurred by the corporation so maybe if the corporation has loans or debts that it cannot pay off generally not all the time and generally the creditors can only go after the assets here inside of the corporation and not try to claim any assets held by their shareholders whereas if your liabilities for sole proprietorship if they cannot be paid off by the business creditors can go after the sole proprietor okay so that's one advantage one non tax advantage a corporation has over an unincorporated business like a sole proprietorship so let's say now what we're learning here in Chapter ten is of course partnerships and in the case of a partnership it's not incorporated like a corporation but like a sole proprietorship now we're combining owners together at least two of them called partners again if you only have one owner in the unincorporated business that would be a sole proprietorship but now we have two or more could be thousands yeah but at least two owners of this unincorporated business and we're calling them partners and just like all the businesses we have to calculate out the profit or the loss the income minus the deductions and now whatever's here in the in the partnership doesn't get taxed just like the sole proprietorship but we still have to prepare a tax return an information return that will do is one of our projects for this chapter ten called a form 1065 now all of this profit on the 1065 has to be and located among the partners and the way we communicate that to the partners is that the partnership is gonna give each partner a schedule called a k1 schedule k-1 to show how much income how much reductions maybe how much tax credits each of these partners now have to report on their individual return assuming the partners up here are people like you and i you and me so they have to follow form 1040 maybe a supplemental schedule ii where we have the partnership income initially reported and maybe another schedule number one all these new schedules eventually being taxed on their 1040 form so just like the sole proprietorship the partnership there's only one layer of taxes and that's at the owner level up here again that's an advantage whereas in the corporation this profit gets taxed one time here at the entity level the corporate level and again if there's any excess profits paid out to the shareholders the shareholders pay taxes again causing that double taxation even though most times qualified dividends get taxed at that lower rates than the marginal rates of their their owners here okay so now if there's liabilities here in the partnership the creditors can go not just to the business the partnership but they may have making go after the owners the partners there's different types of partnerships the most common type i wouldn't in say most common but used to be the most comments called general partners so creditors of a general partnership can go after the assets of the partnership and also after the general partners appear unlike the shareholders up here that we saw yeah so now what's the most common type of business entity is called and it's covered at the end of our chapter current chapter 10 it's called a limited liability company and for tax purposes most limited liability companies are treated just like partnerships the owners of limited liability companies are not called are not called partners like we see for a general partnership the owners of a limited liability company are called members and if you only have one member for an LLC the LLC is generally treated for tax purposes like a sole proprietorship and if you have more than one member for an LLC now that LLC is treated like a partnership yeah you file a form 1065 and there's no tax at this business entity level but the income or the losses are allocated now to the members again using this k1 schedules and now the members have to pay taxes and their share of the profits now again that's an advantage for tax purposes being only taxed at the owner level here at the member level and not at the business entity level and also like the name implies limited liability generally creditors of a limited liability can only good company can only go after the assets of the business and not after the owners of the business just like a corporation so the most common type of business entity used today is an LLC and again this is covered at the end of our chapter 10 and when an LLC has more than one member for tax purposes we treat it just like a partnership filling out this form 1065 issuing 10 a Schedule K ones to the owners so let me show you this article that in the weekly publication of our Pacific Business News here in Hawaii this is for the issue in March 6 and for a week in February there were 369 businesses registered existing on new businesses registered to do business in Hawaii even though it mentions that their corporations they're really not most of them are limited liability companies here listed in alphabetical order as you can see here LLC's LLC's looks like they're all new registered here in Hawaii here's a corporation an incorporated business looks like it's a Calif existing California corporation now registering to do business here on Oahu in Hawaii back in February so if you go down the list you can see the poke the vast majority here's an Inc the vast majority are LLC's and the reason why is because of the tax advantage being taxed at only at the owner level not at the business entity level and because of the name of the entity a limited liability to the business generally now and not to the owners okay so again for most businesses LLC's is the most practical so for most tax returns you're gonna see either again four on one owner just one owner one member LLC we treated as a sole proprietorship preparing a Schedule C like we did back in Chapter three two or more owners now in Chapter ten we prepare a partnership tax return let's talk about what is a partnership basically we're having two or more owners getting together and running a business sometimes we call it a syndicate or joint venture or here in Hawaii sometimes we use the word hooey and each you I and you don't need to have it legally form filing the paperwork but it makes it so much clearer among the partners and pipng dealing with the partnership that there is a legal partnership running here by filing the paperwork so typically the place you would go to register your business be it a partnership or be it some type of other business entity here in Hawaii that would be the Department of Commerce and consumer affairs for most other states they call it the Secretary of State Department in our case DC CA and the business registration division and here on this page you can see the different types of business entities they can be registered with the Department of Commerce including let's see here the basic general partnerships or something called limited partnerships or LLP s limited liability partnerships and the most common one limited liability companies or LLC's here domestic meaning they're being formed here in the our state of Hawaii or foreign limited liability companies not necessarily out of the country but LLC's created outside of Hawaii another state now registering to do business in Hawaii is considered to be a foreign LLC okay so these are just definitions but you still have to register with the state and that probably can be done electronically here using this online application forms and then annual registrations or reports also being done here online again with the Department of Commerce's site okay so that has to probably be done that's not directly related to income taxes here's that type of partnership called general partnership general partnerships all the partners are called general partners all the partners are at risk for any liability of the partnership now if you want to limit the liability of a partner maybe what you can do is create a limited partnership where the limited partnership would have at least one general partner that they can is liable for any liabilities of the partnership but the rest of the partners can be limited partners and limited partners can only lose whatever they invest into the business but they cannot really be managers or take any type of management action inside of the business like a general partner sometimes to even reduce the liability of a general partner this general partner would probably be a corporation and then these may be limited partners could be individuals just investing in the limited partnership again the most common type of business entity used today is the limited liability company or Elsie's where each owner is called a member they have limited liability they can take active management in the partnership certain types of businesses are not allowed to use the LLC entity it's especially professionals that have possibly subject to malpractice suits so in those cases maybe they can form another type of entity called a limited liability partnership and the purpose of an LLC compared to an L l p ll piece compared to LLC's is that partners in a limited liability professional partnership are only liable for their own malpractice their own suits that may be brought against them and not any suits brought up on the by the on their partners gain you're only liable for your own and the general business liability okay so again certain types of businesses generally professionals like doctors and lawyers and accountants cannot use this type of LLC but may be able to use an LLP instead so here again this is really at the end of our chapter 10 we talked about the benefits advantages and disadvantages of an LLC so just like a partnership we only taxed at the owner level the entity the LLC does not pay any income taxes here it says you don't have any general partners yeah it will call them members but they can take active participation in the management of the company and they have limited liability generally whatever they have in the business being invested now again if I'm a creditor to this LLC I want the members to sign off on any type of money they owe me otherwise I'm not gonna lend them money yeah how do I know the LLC has enough assets to cover the liability well I make the live company liable and I also make the owners liable otherwise again I won't lend money to them so you have to beware which side you're on here when you try to a negotiate it tax attributes again only tax is paid by the owner income taxes now yeah and not my the business LLC here it mentions there's maybe another type of entity called not just corporations but an S type that's somewhat treated like an LLC but we get into issues regarding salary or wages being paid to owner employees and we'll talk about that in the next chapter chapter 11 disadvantages here it mentions that there's maybe limited law because LLC's are relatively new well relatively new means a couple decades already of most states using LLC's yeah so I wouldn't say this is a big drawback here it mentions here LLC's are have different rules between among the states and that's true even for partnerships and corporations you know so again not a real big disadvantage and that's why you see LLC's being the most common type of business and the entity being utilized especially for small businesses especially for where we don't have too many owners for our business so we're gonna see maybe in the part 2 or 3 video how we fill out a form 1065 for partnership and again this is going to be one of the projects we have for this chapter can whenever you have a tax return being filed you gotta know what is the tax year and here it says in the case of a partnership it probably has to use the same tax year as the owners so for most individuals like you and me we use a calendar year so the partnership has to also use a calendar year now sometimes especially for joint ventures among corporations that don't have a calendar year whoever owns the largest share of the partnership that's probably the year you're gonna have to use for the partnership and if no one partner has more than owns more than half of the partnership then you can I have to figure out which is the best year to choose among the different partners that creates the lease tax savings that's what do you mean by this aggregate defer method postponing paying the tax which reduces the least amount of tax savings for all other partners combined together but for most cases there's really no questions especially if you're dealing with partners who are people individuals we're gonna use a calendar year the same type of year that the owners have so let's talk about creating forming a new partnership the general rule is that the partners and the partnerships do not have to recognize any gain or loss no reportable gain no reportable loss and of course what's a tax rule without exceptions to the rule there may be income to be reported by the partner if the partner is earning their partnership interest upon a ship ownership by providing services to the partnership a typical example is an attorney me working for a business and doing all the legal work to create the partnerships for the business in exchange the business the partnership is going to give the attorney and partnership interest in the business a certain percentage share of the business okay and in that case whatever that interest is worth the person providing the service has to report the value of that interest as income just like doing work a salary or wage you're getting paid now here you're getting paid with a partnership interest another situation that's the first of these two exceptions the second exception is where a partner owes money but that loan is being taken over is being assumed by the partnership that by itself doesn't cause any gain or loss the gain or loss is gonna be where if that assumed liability by the partnership is greater than the cost basis and we've seen this term before adjust the basis cost basis greater than the cost basis of whatever the partner invested into the partnership okay we'll take a look at some examples here so again what we're trying to calculate here is the partners initial basis initial cost basis when they create a partnership and the easiest way to create a partnership is that just the partners contribute money contribute cash into the partnership and now the partnership has money to buy stuff it needs but if you want to contribute something other than cash like real estate like equipment like any other business asset maybe even the whole business you throw it into the partnership you need to know what's the basis of the property you're contributing into the partnership and now that's going to be the basis plus the cache of whatever you're taking back as a partnership interest basically you're doing an exchange here you're giving up assets cash and other property and in turn you're getting back a partnership interests and whatever basis you have here to what you contribute is gonna now transfer to the partners partnership interests okay the same dollar amount but we saw there were exceptions where you may have to recognize gain and if there is gain you're gonna add that gain to make the partners interest bigger partnership interest bigger bases and you have to also now reduce the partners interest by any liabilities that the other partners are gonna take over so if you have the partnership to go over all of your liabilities and your partnership is 50/50 with another partner you didn't give up all your liabilities you want to give up really half 50% of your liabilities to the other partner so you got to reduce that benefit you got yeah your partnership interest by the benefit of being relieved or some of that liability here's an example we have Ana who contributes looks like wind turbines worth $100,000 now this is not basis yeah this is the value of the property going into the partnership and in exchange is getting backed by 50% interest of this new partnership JSC now her basis in this wind turbines are as forty five thousand also there's a promissory note just like a mortgage of 12,000 against those wind turbines that the partnership is going to assume looks like she's also an attorney that provided services to the partnership and it's worth 13,000 by providing these services by contributing the wind turbines she's getting half interest in the whole partnership so the question is how much gain does she have to realize and also what's her basis in the partnership interests we learned that if you contribute services that's gonna be income right away even though you're not collecting thirteen thousand in cash you're collecting thirteen thousand worth of partnership interests so that she has to pay taxes on this thirteen thousand but that's gonna be part of her basis now also whatever basis she gave up not a hundred thousand that's value but there's forty five thousand for the wind turbines it's also gonna be basis now in her partnership interests but she also gave up the twelve thousand dollar debt and not the whole thing because she's still a 50% owner of this partnership she's still technically liable for half of this debt she got relieved of half or six thousand so that's why you see six thousand being subtracted from her basis here so her basis in her partnership interest after making these contributions is fifty two thousand and again she has to report as taxable income there's thirteen thousand value should receive for providing services to the partnership let's do one more example here less least contributing land to a partnership the value of the land is two million and then the interest in the partnership that is that Leslie that he'll get or she'll get is sixty percent of this new partnership here here is the basis in the land to Leslie so this will be transferred over to her her or his partnership interests but now there's a mortgage on the property that the partnership is going to assume this is the whole mortgage here but still Leslie gonna be liable for sixty percent of that so Leslie only being relieved of forty percent 40 percent of 2.1 million looks like it's what is it 480,000 but we learned that maybe gain taxable to the contributing popular if the amount of liability being relieved of four hundred eighty thousand is larger than the basis of the related property being contributed here 450 or leslie has to report thirty thousand of gain on this contribution and assumption of the mortgage by the partnership okay so thirty thousand gain so now what is lesli's basis in his or her partnership interests well here is the basis of the land so that transfers or carries over to the partnership interests and here's the gain we had just reported but then you gotta reduce it by the forty percent of the mortgage that's assumed by really the other partner so you can see here everything cancels out and Leslie's adjusted basis in his or her partnership interest is zero okay let's stop here this part one video and we'll continue in part two picking up with this initial partnership basis