Excellent video. I'm a tax practitioner that routinely sees clients do "fun" things with partnerships, this is critical knowledge for a CPA in tax. I routinely see Schedules K-1 with losses allocated in excess of tax basis. So who gets hosed out of the loss when the loss is incorrectly allocated? The GP. GP should get a loss allocation because the GP is the guarantor on the debt and on the hook for the loss. If my client is the GP, and I tell them that losses are being allocated to LPs who can't deduct them, and not being allocated to them, their first question to me is usually "can you prepare the return?" Well, yes I can.
Must every distribution be preceded by an allocation? I only see the substantial economic effect requirements mentioned in regards to allocations, but if every distribution requires and allocation then perhaps that is why?
Excellent video. Quick quesiton if you have any knowledge in this area: in the promote/carried interest investment management space, where say the promote partner invests very little or no capital to the pship but provides services instead - when they receive an allocation of income and distribution of cash there after, would this not have SEE? It would certainly be a special allocation. Their capital accounts may go negative because if the investment had depreciation, they would be allocated income that is less than the subsequent distribution. I guess depending on if the partnership agreement had a DRO or QIO would determine it's safe harbor under 704(b) in this case?
So what happens when you fail substantial economic effect and partners interest in the partnership, and the partnership allocation is not respected? What are the consequences of such an outcome?
Thanks for the post. As mentioned in the video the PIP factors apply under Reg 1.704-1(b)(3)(ii). There are many factors to consider and the IRS will then come in and characterize under those factors. It may or may not line up with how the partnership wants to allocate. At that point it can be disputed by going to IRS Agent, Appeals, Court, etc. However, that results in much time and cost, and likely malpractice if a CPA or attorney is advising a tax client. So as CPAs and Attorneys we want to avoid.
Excellent video. I'm a tax practitioner that routinely sees clients do "fun" things with partnerships, this is critical knowledge for a CPA in tax. I routinely see Schedules K-1 with losses allocated in excess of tax basis. So who gets hosed out of the loss when the loss is incorrectly allocated? The GP. GP should get a loss allocation because the GP is the guarantor on the debt and on the hook for the loss. If my client is the GP, and I tell them that losses are being allocated to LPs who can't deduct them, and not being allocated to them, their first question to me is usually "can you prepare the return?" Well, yes I can.
Love the comment and feedback! I could not agree more. Thank you so much for sharing this!!
Thank you. I’m a CPA with Subchapter K knowledge. Great job covering the topic.
Thank you!!
Thanks for the video. Your map helped me a lot to understand these allocations!
You're welcome, Julia!!
Excellent video! So clear and the repetition really helped the concepts sink in.
Must every distribution be preceded by an allocation? I only see the substantial economic effect requirements mentioned in regards to allocations, but if every distribution requires and allocation then perhaps that is why?
Excellent video. Quick quesiton if you have any knowledge in this area:
in the promote/carried interest investment management space, where say the promote partner invests very little or no capital to the pship but provides services instead - when they receive an allocation of income and distribution of cash there after, would this not have SEE? It would certainly be a special allocation.
Their capital accounts may go negative because if the investment had depreciation, they would be allocated income that is less than the subsequent distribution. I guess depending on if the partnership agreement had a DRO or QIO would determine it's safe harbor under 704(b) in this case?
So what happens when you fail substantial economic effect and partners interest in the partnership, and the partnership allocation is not respected? What are the consequences of such an outcome?
Thanks for the post. As mentioned in the video the PIP factors apply under Reg 1.704-1(b)(3)(ii). There are many factors to consider and the IRS will then come in and characterize under those factors. It may or may not line up with how the partnership wants to allocate. At that point it can be disputed by going to IRS Agent, Appeals, Court, etc. However, that results in much time and cost, and likely malpractice if a CPA or attorney is advising a tax client. So as CPAs and Attorneys we want to avoid.
items will have to be reallocated in accordance with the partners' interests in the partnership (PIP) ;)
Thanku!