DGC Enewsletter 3-10

Tips for Forming and Operating a Family Limited Partnership
By Leanne Stafford, CPA and Stephen Colella, CPA

A family limited partnership is commonly used for estate and gift tax planning purposes. Your attorney or estate planning advisor may suggest this vehicle as a way to divide your assets among family members and transfer your wealth to younger generations typically at a discount to the fair market value of the underlying assets. This can be a very beneficial estate and gifting tool, but there are some formalities and housekeeping that goes along with forming and maintaining such an entity with which you should be aware before going down the path of setting one of these up.

The following are a few items that you should consider:

When you set up a partnership to hold certain assets or investments that generate income, you will need to file a federal and state partnership tax return each year to report that activity. The federal and Massachusetts filing deadline is April 15th. You can also extend this deadline to September 15th, which may be necessary if the partnership holds investments, such as hedge fund investments, where these investments do not issue K-1s until after the April 15th deadline.
A partnership tax return typically requires a balance sheet that will need to reconcile with the income that is being reported on the return. The accumulation of data and preparation of an income statement and balance sheet that ties out can be a time consuming process, especially if the assets or investments generate a lot of activity during the year. Under these circumstances, you may want to consider a bookkeeper to prepare an income statement and balance sheet that you can then provide to your tax advisor to help them in preparing the partnership's tax return.
Creating a family limited partnership will also affect your personal tax returns. You will receive a Schedule K-1 reporting your share of the entity’s income and expenses, if you are a partner of the partnership. You should report this information on your personal tax returns. Delays may occur in the filing of the partnership’s tax return and for your own tax return, if the partnership invests in other partnerships.
When a partnership is set up, you should respect that it is an entity separate and apart from yourself and observe all of the formalities provided within the terms of the partnership agreement, particularly the provisions dealing with distributions to partners. The partnership should have its own bank account so any income or expenses that are generated are deposited or paid through the entity’s bank account.

You and the other partners may be required to contribute cash to the entity to cover the expenses, if the entity’s assets or investments do not generate enough income to cover the expenses. When paying for partnership expenses out of your own personal assets, care needs to be given to avoid an unintended gift to the other partners of the partnership. This can happen when one partner pays an expense of the partnership that is rightfully considered an expense allocable to all partners, and the partner who pays the expense is not reimbursed by the partnership or other partners for their allocable share.

It is critical that personal expenses of the partners are not paid by the partnership on behalf of its partners or otherwise treat the partnership as a personal “pocketbook” of the partners.

When you select the assets or investments to fund the partnership, you should determine the fair market value and identify the cost basis of these assets and investments before you transfer them into the partnership. This will help with tracking your investment or tax basis in the partnership and in the case of the fair market value, apply certain income rules where the fair market value differs from the tax basis of the assets at the time of formation. This information is needed if you sell your partnership interest or if you would like to receive distributions from the partnership.

Special gain recognition rules apply if partners contribute appreciated investment assets in a manner that results in diversification. Built-in gain or loss must also be tracked for each partner’s contributed assets, regardless of the application of such rules, if such contributions are made with assets other than cash.

Respecting the formalities of the partnership and performing the necessary accounting procedures are key if you want the IRS to do the same. Otherwise, this could lead to adverse estate and gift tax consequences if the IRS were to challenge its status. Please consult with anyone on your DGC team if you have any questions or If you would like to find ways to better structure and/or operate your Family Limted Partnership.

Rebounding Economy Still Ripe for Claiming Losses on Investments
by Sarah Wulf, CPA

While waiting for the economy to rebound, investors should be aware of potential tax saving opportunities related to losses. Losses on certain investments may qualify to be treated as ordinary losses rather than capital losses. Ordinary losses are available to offset ordinary income such as wages, interest and dividends. Investors who are married and filing jointly can claim up to $100,000 of qualifying losses as ordinary losses each tax year ($50,000 for those who file single).

Investors should review their portfolios periodically to determine if any of their stock holdings meet the following criteria:

The company is a U.S. corporation,
When the stock was purchased, the company’s total capital was less than $1 million,
The stock was purchased with either cash or other property, and
The company primarily earned its revenue from normal business operations.

If you answered yes to all of these questions, you may be in a position to qualify for an ordinary loss of up to $100,000.

Please call your DGC team member to discuss your specific facts and to discuss how a transaction might affect your tax situation in 2009 or future years.

DGC to Present at Upcoming Residential Design and Construction Convention
DGC will be presenting “Design and Construction Practice Management and Tax Strategies” at the upcoming Residential Design and Construction (RDC) convention. The event takes place April 14-15, 2010 at the Seaport World Trade Center in Boston. RDC is a two-day convention and tradeshow featuring more than 200 product exhibits, 85 workshops, and special events focusing on New England’s residential design and construction industry. The conference program features workshops and tours led by internationally and nationally recognized leaders.

This year, DGC will be presenting the following workshop:

Workshop Name: Design and Construction Practice Management and Tax Strategies
Workshop number: BO2
Presenters: Jim Lemay, CPA and Eric Bookbinder, CPA
Date: Thursday, April 15
Time: 10:00 – 11:30 a.m.

To receive a 25% registration discount on all RDC workshops use the promo code RDCSPEAK when registering online at www.rdcboston.com.

March 18 – Commercial Finance Association (CFA) – March Madness Networking Event
March 23 – Turnaround Management Association (TMA) – Your “Lizard Brain” and Your Money
March 24 – Cambridge Chamber – Young Professionals Networking Event
March 24 – Real Estate Finance Association (REFA) - After Hours @ Hard Rock Cafe
March 25 – ACG Women’s Executive Forum – What Every Board Member Needs to Know
March 25 - East End House - Cooking for a Cause
March 30 – Greater Boston Chamber – Boston After Five
March 31 – Greater Boston Chamber – Innovation Forum