Question

What is a flow through entity and how is it taxed? What specific economic rights or entitlements are included with a partnership interest? What is "inside basis" and "outside basis" and why are they relevant in partnership taxation? What is "recourse debt" and "nonrecourse debt" and how are they generally allocated to partners? How does a partnership determine its accounting period (i.e., year end) and method (i.e., can it be cash basis or does it have to be accrual basis)? How does a partnership calculate and characterize it's ordinary business income and separately stated items? How is a partner's share of partnership income reported to the partners? If a partnership has losses, how do the (1) basis, (2) at-risk, and (3) passive activity loss limits apply to partners?

Answer 1

1)Flow through entity is a legal entity where income flows through to investors or owners and entity as such is not subjected to tax on income. Flow through entities are also called as pass through entities. owners are directly taxed individually on the income, taking into account their share of the profits and losses.

2) a) capital interest - right to share the partnership assets during liquidation

    b) Profit interest - right to share the partnership profit and loss from the business

3) inside basis is the basis a partner takes in the assets that the partnership holds while calculating the gain or loss recognized when partnership assets are sold by the firm

outside basis is the tax basis each partner has in the partnership - this is required to compute the gain or loss recognized on the partnership interest when sold.

4) Debt that holds the borrower personally liable is a recourse debt. All other debts where this element of personal liability is non existing is called as non recourse debt.

5)Recourse debt is directly or exclusively allocated to the owner who is at risk of loss