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AccountingNerd8
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| Posted: 05 Jan 2010 at 13:17 | IP Logged
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How is an interest-free loan from a partnership to a partner treated? Wiley says that it will not effect the pass-through of income, but how will the partner report the loan on his tax return?
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EAK5455
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| Posted: 08 Jan 2010 at 11:10 | IP Logged
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I'm not 100% sure on this but my gut says that the partner
would recognize ordinary income to the extent of imputed
interest (covered in the Wiley 2009 review book, individual
taxation module, page 366).
Basically, an average rate on federal securities is used
and any excess of this rate over the loan rate is imputed
as interest. The partnership is treated as having paid
salary (guaranteed payments) to the partner and the partner
recognizes ordinary income on his tax return.
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AccountingNerd8
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| Posted: 08 Jan 2010 at 12:12 | IP Logged
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So the partner would recognize ordinary income, which is different from partnership income? Because a question in the wiley book asks for partnership income that is taxable to the partner, and they do not include the loan. (pg537, Q22)
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cpa0123
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AccountingNerd8 - Can you post the problem with the explanation given? I am also waiting for an answer to this question. I really wanna know...
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EAK5455
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| Posted: 08 Jan 2010 at 12:32 | IP Logged
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The question is really trying to test your ability to
determine the partnership pass-through income and how/if
each of the items in the question would affect the
partner's basis. The solution states that the interest-
free loan will not affect the passthrough of partnership
income. They're right. What they are really trying to
say, however, is that the interest-free loan isn't going
to be treated like a distribution of property in which
the partner's basis would be directly reduced by the
amount of the loan.
I read a little further into the concept of imputing
interest and the text states that "no interest is imputed
to either the borrower or the lender for any day on which
the aggregate amount of loans between such individuals
does NOT exceed $10,000".
Therefore, there would be no imputed interest and the
loan would have no effect on the pass-through of income
because the lender (the partnership) would have no
interest imputed against it. Additionally, the partner's
return would not be affected because there is no interest
imputed against him (the borrower) and the loan proceeds
are not taxable.
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Topic: Interest-free loan from partnership
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