Question

Ms. Kim is a general partner who holds a 50% interest in Mustang Partnership. This year, Mustang earned ordinary business income of $200,000 before accounting for any payments to partners. Mustang also received $8,000 in qualified dividend income and $3,000 of municipal bond interest income. During the year, Mustang paid Ms. Kim a $60,000 guaranteed payment for services to the partnership plus an additional cash distribution of $30,000 (assume Mustang made no payments to any other partner). Ms. Kim’s ordinary income tax rate is 25% and long-term capital gain and dividend tax rate is 15%. At the beginning of the year, Ms. Kim’s basis in her Mustang Partnership interest was $270,000.

a. Determine the tax cost of Ms. Kim’s share of Mustang partnership’s income for the year (ignore self-employment tax and the QBI deduction).

b. Determine Ms. Kim’s after-tax cash flows from her investment in Mustang partnership for the year.

c. Determine Ms. Kim’s basis in her Mustang Partnership interest at the end of the year.

Answer 1

a

Guaranteed payments are ordinary income to partner= $60,000 (taxable at 25%)

Share of partnership ordinary income = ($200,000 - $60,000) X 50% = $70,000 (taxable at 25%)

Share of dividend = $8,000 X 50% = $4,000 (taxable at 15%)

Total tax cost = $60,000 X 25% + $70,000 X 25% + $4,000 X 15% = $33,100

Municipal bond interest is tax-exempt

Thus, total tax cost of partnership income is $33,100

b

Cash received from partnership = $60,000 + $30,000 = $90,000

After tax cash flow = $90,000 - $33,100 = $56,900

c

Basis in partnership:

Particulars	Amount
Beginning basis	$        270,000
Add: share of
Net income after guaranteed payment	$          70,000
Ordinary dividends	$            4,000
Municpal bond interest	$            1,500
Less: distributions	$         (30,000)
Ending basis	$        315,500

Ending basis in partnership is $315,500.

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