Question

Anne, Bob, and John agree to form a partnership to own and operate The Riverside. Anne and Bob will each contribute one-half of the capital. Bob will contribute the real estate at a value of $3 million. Anne will contribute the equipment and the restaurant furnishings at a value of $1 million and the cost of improvement, which amounts to $2 million. John will oversee the construction and when complete, he will vest in a 5 percent interest in the partnership’s capital. On an ongoing basis, John will oversee the partnership’s operations in exchange for a fixed salary and 20 percent of the partnership’s ongoing profits. The construction is estimated to be completed in June of 2016, and his capital interest is estimated to be valued at $400,000 at that time.

What are the tax consequences if the trio forms The Riverside as a partnership to own and operate the restaurant?

Answer 1

Under the taxation method transfers all the profits/losses of an Limited partnership to all the partners and they report
the shares in each of their individual tax return. This is pass through taxation
Partners need to file their return even in case income is retained by the partnership.
As partners pay the taxes hence tax authorities in rare cases audit prtnership.
Profits/losses of the partnership is distributed to the partners, which is turn pay taxes in their individual tax return hence no tax is paid by partnership itself.
In LP their liability is limited to the capital invested by them.
Capital invested
Bob $3 million
Anne $3 million
John basis is .4 million
If any doubt please comment