Thursday, June 30, 2011

Sale of Partnership Interests

Price appreciation or depreciation realized by a partner on partnership basis results in a tax consequence upon sale of a partnership interest. A partners basis is equal to the initial contribution of cash and property or initial basis interest plus partnership adjustments from subsequent activities. If a partnership holds unrealized receivables or inventory these items are taxed at ordinary rates, where as capital assets are taxed a capital gains rates - determined by the holding period of the asset.

When sale of a partnership interest occurs mid year, economic activity must be computed as of the day of sale of interest. For example a partner who sells his 25% holding in a partnership on June 30th would receive a K-1 with the partnerships activities for the first two quarters of the year. These amounts would be special allocation determined either by an accounting software P&L as of 6/30 or similar activity. The K-1 would be marked final. The partner would record on his 1040 either a gain or loss from sale of partnership interest - capital gains on Schedule D and sale of hot assets on from 4797. A partnership with real estate would record gain based upon the holding period of the asset and depreciation received by the partner would be ordinary income recapture to beginning ownership basis.

To compute the gain on sale of partnership assets, create a spreadsheet showing adjusted basis in one column and FMV in another with resulting gain in the third column multiplied by adjusting tax rates. The agreement of sale of partnership interest can allocate sale price according to assets (and likely the best) so as obtain the customized tax attributes. In other words, depending upon the asset combination of the partnership, you can sell ordinary gain assets at cost and allocate the gains to capital items.

Tuesday, June 28, 2011

Individual Retirement Accounts

The two most popular retirement accounts are traditional and Roth IRA's. An employee may have a traditional IRA even if covered by an employer-sponsored retirement plan. Contributions to IRA's are limited to the lesser: a.)the participants compensation b.) statutory limits. Contributions cannot be made in a year the participants has reached age 70 1/2 or for any later year. Contributions can be $5,000 for individuals under age 50, and $6,000 for age 50 and older.

A traditional IRA contribution is deductible from income and distributions are taxed. A Roth IRA is subject to the same rules a traditional but the contributions are not deductible, yet the distributions are tax free. For younger taxpayers, Roth investment accumulations may provide a more advantageous way to reel in substantial non-taxed capital gains.

IRA investments can be made in mutual funds, brokerage companies, life insurance companies and other financial institutions. An IRA cannot invest invest in collectibles such as artwork, gems or stamps.

An excess contributions occurs when a taxparers contributes an amount that exceeds the statutory or participant compensation amounts. A 6% penalty applies each year the excess remains in the account. Form 5329 is used to calculate and pay the penalty.

A Simplified Employee Pension is a, IRA for businesses were employees can contribute up to 25% of wages to $49,000 and Self employed individuals can contribute 20% of net SE income after one half SE tax deduction, up to $49,000.

Monday, June 27, 2011

Filing Gift Tax Return

A form 709 Gift Tax Return must be filed by April 15th if a tax payer has made a gift in excess of $13,000 to anyone other than a spouse or charity during the tax year. Gifts in excess of $13,000 or gifts of future interests of value in excess of $13,000 must be reported. Their is a lifetime gift tax exclusion of $5,000,000 for taxpayers who gifts in excess of $1,000,000 for duration.