Partnerships, Basis, Distributions and Audits
This topic covers partnership income, expenses, distributions, guaranteed payments, property contributions, partner basis, interest dispositions, formation, dissolution, filing penalties, cancellation of debt, and partnership-level audits.
How to study for EA Part 2
Build every answer around entity classification, filing obligation, owner basis, income and deduction character, payroll duties, accounting records, and specialized taxpayer rules.
Core concepts
Concept 1
Partnerships, Basis, Distributions and Audits questions test whether an enrolled agent candidate can apply business tax rules to entity, return, owner, and recordkeeping facts.
Exam cue: Identify the entity, tax year, owner role, form, accounting method, record source, and whether the issue is income, deduction, credit, basis, payroll, or advice.
Concept 2
The best answer usually identifies the business form, tax year, filing obligation, income or deduction character, owner-level consequence, and penalty exposure before calculating.
Exam cue: Check basis, distributions, depreciation, employment tax deposits, QBI limits, method changes, due dates, penalties, and information reporting.
Concept 3
Eliminate answers that ignore entity classification, basis, payroll deposits, accounting method, book-tax reconciliation, or specialized taxpayer filing requirements.
Exam cue: Tie the result to the correct business return, schedule, K-1, payroll form, book-tax reconciliation, owner basis, or specialized taxpayer return.
Risk pitfalls and guardrails
Solving as if every business were a sole proprietorship instead of respecting entity classification and owner-level rules.
Guardrail: Use a 15-second safety pause before finalizing your action.
Calculating a deduction or credit without checking basis, at-risk limits, passive limits, depreciation elections, or payroll compliance.
Guardrail: Use a 15-second safety pause before finalizing your action.
Missing specialized taxpayers such as trusts, estates, exempt organizations, retirement plans, farmers, and rental real estate.
Guardrail: Use a 15-second safety pause before finalizing your action.
Memory anchors
Partner Basis
A partner's outside basis tracks investment and limits loss deductions and tax-free distributions.
Guaranteed Payment
A guaranteed payment compensates a partner without regard to partnership income and has special reporting effects.
Property Contribution
Contributed property can carry built-in gain or loss and affects both partnership and partner basis.
Partnership Distribution
A partnership distribution is generally tax-free to the extent of partner basis unless cash exceeds basis.
Separately Stated Item
Separately stated items preserve character when they pass through to partners.
Partnership Interest Sale
Disposition of a partnership interest requires basis, amount realized, and possible ordinary income recharacterization.
Partnership Formation
Formation usually does not trigger gain unless special rules such as debt relief apply.
Partnership Dissolution
Dissolution requires final reporting, allocation, and basis consequences.
Centralized Audit
Partnership audit rules can assess adjustments at the partnership level unless an exception or election applies.
Partnership COD
Partnership cancellation of debt can create pass-through income and basis or attribute consequences.
Checkpoint rule
Do the check-up only after you can summarize each concept in one sentence and identify one dangerous pitfall from memory.
Knowledge Check (after reading)
Short check-up to confirm understanding of this module.
Check-up Questions
Mira contributes $30,000 cash to a new partnership for an interest. She recognizes no gain. What is her initial outside basis?
Jon contributes land with a $24,000 adjusted basis and $41,000 fair market value to a partnership solely for an interest. No liabilities are involved. What is Jon's initial outside basis?
Answer all questions to submit.
Next step personalized recommendations
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Move forward only after this module is stable.
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