CPA Regulation Reg Quiz
Practice Determine Partnership Basis And Capital Accounts in CPA Regulation Reg with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.
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EF LLC (taxed as a partnership) has two equal partners, E and F. On January 1, E contributes 30,000cashandFcontributesserviceswithanagreedvalueof30,000 in exchange for a 50% capital and profits interest. Capital accounts are maintained under Treasury Regulations §1.704-1(b)(2)(iv), and the LLC has no liabilities. Which item affects F's capital account but not F's outside basis at formation under Internal Revenue Code §722?
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EF LLC (taxed as a partnership) has two equal partners, E and F. On January 1, E contributes 30,000cashandFcontributesserviceswithanagreedvalueof30,000 in exchange for a 50% capital and profits interest. Capital accounts are maintained under Treasury Regulations §1.704-1(b)(2)(iv), and the LLC has no liabilities. Which item affects F's capital account but not F's outside basis at formation under Internal Revenue Code §722?
Explanation: Internal Revenue Code §722 establishes a partner's basis from contributions, excluding services which are not 'property' under §721. F contributes services valued at 30,000,creditedtocapitalbutnotincreasingoutsidebasis,asservicestriggerincomerecognitionunder§83butbasisremainszeroper§722.The30,000 affects capital but not basis, aligning with the distinction between book capital and tax basis. Choices B, C, and D are incorrect as they involve property basis or liabilities, which do not apply to services. Specifically, choice C relates to E's cash, not F's basis. Professionals must differentiate capital account credits from tax basis adjustments, especially for non-property contributions. A key rule is that basis from services is zero unless cash or property is also contributed, with value taxed as income.
At the beginning of the year, Kim's adjusted basis in her K&L partnership interest was 60,000.Kimhasa5080,000 in ordinary business income and 10,000intax−exemptinterestincome.Thepartnershipalsomadea30,000 cash distribution to Kim.
What is Kim's adjusted basis in her partnership interest at the end of the year?
Explanation: A partner's basis is increased by their share of both taxable and tax-exempt income and decreased by distributions. Kim's share of ordinary income is (50% * 80,000=40,000). Her share of tax-exempt income is (50% * 10,000=5,000). Her ending basis is calculated as: Beginning basis (60,000)+Shareofordinaryincome(40,000) + Share of tax-exempt income (5,000)−Cashdistribution(30,000) = ($75,000).
Sara received a 25% interest in the capital and profits of the RST Partnership for services rendered. The fair market value of the partnership interest she received was 40,000.Inaddition,Sara′sshareofpartnershipliabilitiesatthetimeshewasadmittedwas15,000. How much income must Sara recognize, and what is her initial tax basis in the partnership interest?
Explanation: When a partnership interest is received for services, the fair market value of the interest is treated as compensation and is recognized as ordinary income by the partner. Therefore, Sara must recognize 40,000ofincome.Herinitialbasisistheamountofincomesherecognizes(40,000) plus her share of partnership liabilities (15,000). Thus, her initial basis is \(40,000 + 15,000=55,000).
The ABC Partnership has three equal partners: Ann, Ben, and Carl. At the beginning of the year, the partnership had a nonrecourse liability of 90,000.Duringtheyear,thepartnership′snonrecourseliabilitiesincreasedto150,000. Ann's basis in her partnership interest before accounting for the liability change was $50,000.
What is Ann's adjusted basis in her partnership interest after accounting for the change in liabilities?
Explanation: An increase in a partner's share of partnership liabilities is treated as a cash contribution, which increases the partner's basis. The total increase in nonrecourse liabilities is (150,000−90,000 = 60,000\). Ann's share of this increase is \(1/3 * 60,000 = 20,000\). Her adjusted basis is her basis before the change (50,000) plus her share of the liability increase (20,000), for a total of \(70,000).
Marta is a 50% partner in the MT Partnership. At the start of the year, her basis was 35,000.Duringtheyear,thepartnershipincurreda90,000 ordinary loss. The partnership also had $10,000 of portfolio income. The partnership made no distributions during the year.
What is the maximum amount of the partnership loss that Marta can deduct on her personal tax return for the year, and what is her ending basis?
Explanation: A partner's basis is first increased by income items and then decreased by losses. Marta's basis is first increased by her share of portfolio income: (35,000+(50%∗10,000) = 40,000\). Her share of the ordinary loss is \(50\% * 90,000 = 45,000\). However, a partner can only deduct losses up to their basis. Therefore, Marta can deduct only 40,000 of the loss. Her basis is reduced to zero. The remaining $5,000 loss is suspended and can be carried forward indefinitely.
Paul, a partner in the PQR partnership, has an adjusted basis of 70,000inhisinterest.Thepartnershipmakesanon−liquidatingdistributiontoPaulofaparcelofland.Thelandhasanadjustedbasistothepartnershipof80,000 and a fair market value of $100,000.
What is Paul's basis in the land after the distribution, and what is his remaining basis in the partnership interest?
Explanation: In a non-liquidating distribution of property, the partner's basis in the distributed property is the same as the partnership's basis (a carryover basis), but it cannot exceed the partner's basis in the partnership interest. Here, the partnership's basis in the land (80,000)isgreaterthanPaul′soutsidebasis(70,000). Therefore, Paul's basis in the land is limited to 70,000. His basis in the partnership interest is reduced by the basis he takes in the land, so \(70,000 - 70,000=0).
Dale is a 25% partner in a general partnership. At the beginning of the year, Dale's basis was 40,000.Thepartnership′sonlyliabilityisa100,000 recourse loan. During the year, the partnership repays 40,000oftheloanprincipal.Thepartnershiphad80,000 of ordinary income for the year.
What is Dale's adjusted basis at the end of the year?
Explanation: A partner's basis is adjusted for their share of income and changes in liabilities. The decrease in partnership liabilities is treated as a cash distribution. Dale's share of the liability decrease is (25% * 40,000=10,000). His share of the ordinary income is (25% * 80,000=20,000). His ending basis is: Beginning basis (40,000)+Shareofincome(20,000) - Deemed distribution from liability decrease (10,000) = \(50,000).
On January 1, Year 1, Ethan contributed property to the EF Partnership for a 50% interest. The property had an adjusted basis of 30,000andafairmarketvalueof50,000. Ethan's capital account was credited for $50,000. The partnership has no liabilities.
What is Ethan's initial tax basis and book capital account in his partnership interest?
Explanation: A partner's initial tax basis in a partnership interest received for a property contribution is the adjusted basis of the property contributed. Therefore, Ethan's tax basis is 30,000.Apartner′sbookcapitalaccountunderSection704(b)isgenerallycreditedwiththefairmarketvalueofthepropertycontributed.Therefore,Ethan′sbookcapitalaccountis50,000. This creates a book-tax difference.
Which of the following events will cause a partner's adjusted basis in their partnership interest to decrease?
Explanation: A partner's basis is decreased by their distributive share of partnership losses and non-deductible expenses that are not capital expenditures. Charitable contributions are separately stated items that are non-deductible at the partnership level but flow through to the partners, decreasing their basis. Tax-exempt income and Section 1231 gains increase basis. Guaranteeing debt can increase a partner's share of recourse liabilities, which increases basis.
The XYZ partnership has a general partner, Xavier, and a limited partner, Yasmine. Each has a 50% interest in profits and losses. The partnership has a 200,000recourseliabilityanda100,000 nonrecourse liability. Xavier's basis before considering liabilities is 50,000.Yasmine′sbasisbeforeconsideringliabilitiesis50,000.
What is Yasmine's adjusted basis in her partnership interest?
Explanation: A limited partner generally does not have an economic risk of loss for recourse liabilities, so they are not allocated any basis from them (unless they guarantee the debt). Nonrecourse liabilities are allocated to all partners, typically based on their profit-sharing ratio. Yasmine's basis is her initial basis (50,000) plus her share of nonrecourse liabilities \(50\% * 100,000 = 50,000\). Her total basis is \(50,000 + 50,000=100,000).
At the beginning of the year, Pat's basis in his partnership interest was 25,000.Hisshareofpartnershipordinarylossfortheyearwas35,000. His share of the increase in partnership liabilities for the year was $5,000.
What is the amount of loss from the partnership that Pat can deduct on his current year tax return?
Explanation: A partner's ability to deduct losses is limited to their basis in the partnership interest. The basis is adjusted for any changes in liabilities before applying the loss limitation. Pat's basis for loss limitation purposes is his beginning basis (25,000)plushisshareoftheincreaseinliabilities(5,000), which equals 30,000.Althoughhisshareofthelossis35,000, he can only deduct up to his adjusted basis of 30,000.Theremaining5,000 loss is suspended.
Amy contributes inventory to a partnership in exchange for a 20% interest. The inventory has an adjusted basis of 10,000andafairmarketvalueof15,000. The partnership has no liabilities. What is Amy's initial basis in her partnership interest and what is the partnership's basis in the inventory?
Explanation: Generally, no gain or loss is recognized on a contribution of property to a partnership in exchange for a partnership interest. The partner's basis in the partnership interest (outside basis) is the adjusted basis of the property contributed. The partnership's basis in the contributed property (inside basis) is the same as the contributing partner's adjusted basis. Therefore, Amy's outside basis is 10,000,andthepartnership′sinsidebasisintheinventoryisalso10,000.
Tom contributed equipment to a partnership for a one-third interest. The equipment had a fair market value of 90,000andanadjustedbasistoTomof40,000. The partnership also assumed a $30,000 loan on the equipment. The other two partners contributed cash.
What is Tom's initial basis in his partnership interest?
Explanation: A partner's basis is their contributed property's adjusted basis (40,000),reducedbythetotaldebtassumedbythepartnership(30,000), and increased by the partner's share of that debt. Tom's share of the debt is (1/3 * 30,000=10,000). So, his basis is (40,000−30,000 + 10,000=20,000). This is equivalent to taking the basis of the asset and subtracting the portion of the debt relieved, which is the share assumed by the other partners (2/3 * 30,000=20,000), so (40,000−20,000 = $20,000).
A new partner acquires a 25% interest in a partnership by contributing an asset with a basis of 50,000andafairmarketvalueof100,000. The partnership has existing liabilities of $80,000, all of which are nonrecourse. What is the partner's initial outside basis?
Explanation: The partner's initial basis is the adjusted basis of the property contributed plus the partner's share of existing partnership liabilities. The basis of the contributed asset is 50,000. The partner's share of the nonrecourse liabilities is \(25\% * 80,000 = 20,000\). Therefore, the partner's initial outside basis is \(50,000 + 20,000=70,000).
Wendy is a 50% partner in the WR partnership. Her basis in the partnership interest at the beginning of the year was 80,000.Duringtheyear,thepartnershiphadgrossrentalincomeof100,000, operating expenses of 60,000,andpaidafineof10,000 for a local ordinance violation. The partnership distributed $15,000 to Wendy.
What is Wendy's basis at the end of the year?
Explanation: First, calculate partnership net income: (100,000−60,000 = 40,000\). Wendy's share is \(50\% * 40,000 = 20,000\). The fine is a non-deductible expense that reduces partner basis. Wendy's share is \(50\% * 10,000 = 5,000\). Wendy's ending basis is: Beginning basis (80,000) + Share of income (20,000)−Shareofnon−deductiblefine(5,000) - Cash distribution (15,000) = \(80,000).
Dan has a 60,000basisinhispartnershipinterest.ThepartnershipdistributestoDan,inanon−liquidatingdistribution,twoassets:20,000 in cash and inventory with a basis to the partnership of $50,000.
What is Dan's basis in the inventory he receives?
Explanation: In a non-liquidating distribution, basis is first reduced by any cash received. Dan's basis becomes (60,000−20,000 = 40,000\). The basis of distributed property to the partner is the partnership's basis in that property, but it cannot exceed the partner's remaining basis in the partnership interest. The partnership's basis in the inventory is 50,000, but Dan's remaining basis is only 40,000.Therefore,Dan′sbasisintheinventoryislimitedto40,000.
Cobb is a 25% partner in the CDE Partnership. At the beginning of the year, his outside basis was 30,000.Duringtheyear,thepartnershiphada160,000 ordinary loss and a $20,000 increase in partnership recourse debt.
What is Cobb's adjusted basis in his partnership interest at year-end?
Explanation: A partner's basis cannot be negative. First, adjust the partner's basis for changes in liabilities. Cobb's share of the debt increase is (25% * 20,000=5,000). His basis before considering the loss is (30,000+5,000 = 35,000\). Next, account for his share of the loss, which is \(25\% * 160,000 = 40,000\). The loss deduction is limited to his basis. Therefore, he can deduct 35,000 of the loss, which reduces his basis to 0.Theremaining5,000 loss is suspended and carried forward.
Rick's basis in his partnership interest is 40,000.Hereceivesanon−liquidatingcashdistributionof15,000 and a distribution of property with an adjusted basis to the partnership of $30,000.
What is Rick's basis in his partnership interest after the distributions?
Explanation: When a partnership makes distributions, cash is considered first. Rick's basis is first reduced by the cash distribution: (40,000−15,000 = 25,000\). This becomes the remaining basis available for the property distribution. The partner's basis in the distributed property is the partnership's basis (30,000), limited to the partner's remaining outside basis (25,000).So,Ricktakesa25,000 basis in the property. His partnership basis is then reduced by the basis he takes in the property: (25,000−25,000 = $0).
Which of the following items increases a partner's tax basis in their partnership interest but does not increase their Section 704(b) book capital account?
Explanation: A partner's tax basis is increased by their share of partnership liabilities. However, partnership liabilities are not considered part of a partner's capital account for book purposes under Section 704(b). Tax-exempt income, cash contributions, and ordinary income all increase both the partner's tax basis and their book capital account.
Leo contributes land to the newly formed LMN Partnership in exchange for a 33% interest. At the time of contribution, the land has an adjusted basis of 50,000andafairmarketvalueof80,000. The land is subject to a mortgage of $20,000, which the partnership assumes. What is Leo's initial basis in his partnership interest?
Explanation: A partner's initial basis in a partnership interest is the adjusted basis of the property contributed, increased by the partner's share of partnership liabilities and decreased by any of the partner's individual liabilities assumed by the partnership. Leo's basis is calculated as follows: Adjusted basis of land contributed (50,000)minusthefullmortgageassumedbythepartnership(20,000), plus Leo's 33% share of that mortgage now considered a partnership liability (33% * 20,000=6,600). The calculation is (50,000−20,000 + 6,600=36,600).