Assume a partnership is profitable and that its tax year ends on December 31 but

Question

Assume a partnership is profitable and that its tax year ends on December 31 but one of its partner's tax year ends on September 30. Does the partnership enjoy a tax benefit or detriment from the partnership's use of a December 31 tax year end? Explain and give an example. Will each of the following increase, decrease, or have no effect (NE) on a partner’s basis in a partnership interest: a. Operating loss of the partnership. b. Capital gains of the partnership. c. Tax-exempt income of the partnership

Explanation / Answer

One of partner tax year ends on September 30 which is different from the partnership year end. Sp the partner will receive nine months deferral on his interest of the partnership that has December 31 as year end.The partner will report income/loss of the partnership using 31 December year end.In the return of partner he will report the first year of the partnership which includes partnership year end i.e 31 December. as aresult the partner to defer the first nine months of income/loss from the partnership until the following year. So he has tax benefit.

Partner Jim reports income using a 30 September, while the partnership of which Jim is a member reports its income using a fiscal year ending december 31. The partnership reports its income and deductions under the cash method of accounting. During the partnership taxable year ending December 31, 2015, the partnership makes guaranteed payments of $120,000 to Jim for services and for the use of capital. Of this amount, $70,000 was paid to Jim between January 1 and September, 2015, and the remaining $50,000 was paid to Jim between 1 October and December 31, 2015. So Jim can have deferral of income for nine months $90000 will be deffered and $50000 includible in AJim taxable income for 30 september

a. Operating loss of the partnership. It will decrease the partnership basis for the partner as it is a loss.

b. Capital gains of the partnership. It will increase the partnership basis for the partner as it is a capital gain

c. Tax-exempt income of the partnership: It will have no effect because it is tax exemt income in nature

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