Partnership and Depreciation

[Questionguy101]

Taxpayer X and Y started a partnership on 1-1-2011.

Taxpayer X bought the 50% ownership of Taxpayer Y on 6-30-2011. So the partnership was dissolved as of 6-30-2011.

Form 1065 is to be filed for the partnership for the period between 1-1-2011 to 6-30-2011. And this will be both the initial and the final partnership tax return.

Since the partnership started and ended in the same year (2011), no depreciation deduction is allowed in the 2011 partnership tax return.

It doesn't really matter to Taxpayer Y anyway because, even if depreciation can be claimed, he will have to adjust the tax basis when he reports the sale of his 50% ownership to Taxpayer X in his 2011 individual tax return. So it will just be an offset eventually.

But does that mean Taxpayer X will lose the depreciation deduction of the period between 1-1-2011 to 6-30-2011 because the partnership was dissolved in the same year?

[Bees Knees]

Since the partnership started and ended in the same year (2011), no depreciation deduction is allowed in the 2011 partnership tax return.

The disallowance of depreciation applies when an asset is bought and sold in the same year. The fact that the partnership did not exist for the entire year is irrelevant.

The question is, did the asset continue to be used as a business asset after the partnership terminated? I assume it did as an asset for the sole owner who continued to operate the business as a sole proprietor after the partnership ended. If so, then first year depreciation is split between the partnership and the sole proprietorship, with depreciation continuing on for the sole proprietorship for the following years as if the asset was originally purchased for the sole proprietorship.

Example: A machine is purchased in January of 2011 by the partnership for $10,000. The partnership ends June 30th, and the machine is distributed to one of the partners who continues to use it for his sole proprietorship starting July 1, 2011, and all years after. If depreciation for the machine is 14.29% for year one (7 yr MACRS), then the partnership gets $715 of depreciation for its half year of existence ($10,000 X 14.29% ÷ 2), and the sole proprietorship gets $714 of depreciation on the machine for the second half of 2011. In 2012, assuming the sole proprietorship continues to use the machine, it gets $2,449 for a depreciation deduction ($10,000 X 24.49%), and so on.

[taxea]

The disallowance of depreciation applies when an asset is bought and sold in the same year. The fact that the partnership did not exist for the entire year is irrelevant.

The question is, did the asset continue to be used as a business asset after the partnership terminated? I assume it did as an asset for the sole owner who continued to operate the business as a sole proprietor after the partnership ended. If so, then first year depreciation is split between the partnership and the sole proprietorship, with depreciation continuing on for the sole proprietorship for the following years as if the asset was originally purchased for the sole proprietorship.

Example: A machine is purchased in January of 2011 by the partnership for $10,000. The partnership ends June 30th, and the machine is distributed to one of the partners who continues to use it for his sole proprietorship starting July 1, 2011, and all years after. If depreciation for the machine is 14.29% for year one (7 yr MACRS), then the partnership gets $715 of depreciation for its half year of existence ($10,000 X 14.29% ÷ 2), and the sole proprietorship gets $714 of depreciation on the machine for the second half of 2011. In 2012, assuming the sole proprietorship continues to use the machine, it gets $2,449 for a depreciation deduction ($10,000 X 24.49%), and so on.

You are saying that the K-1 for the partner that ended the partnership would show his portion of the depreciation deduction for the six months it was in existance>

[Bees Knees]

You are saying that the K-1 for the partner that ended the partnership would show his portion of the depreciation deduction for the six months it was in existance>

Yes - one half of the first year depreciation that is allocated to the partnership is reflected in the partnership net income or loss that is then split between each partner on their K-1s.

[Questionguy101]

The disallowance of depreciation applies when an asset is bought and sold in the same year. The fact that the partnership did not exist for the entire year is irrelevant.

The question is, did the asset continue to be used as a business asset after the partnership terminated? I assume it did as an asset for the sole owner who continued to operate the business as a sole proprietor after the partnership ended. If so, then first year depreciation is split between the partnership and the sole proprietorship, with depreciation continuing on for the sole proprietorship for the following years as if the asset was originally purchased for the sole proprietorship.

Example: A machine is purchased in January of 2011 by the partnership for $10,000. The partnership ends June 30th, and the machine is distributed to one of the partners who continues to use it for his sole proprietorship starting July 1, 2011, and all years after. If depreciation for the machine is 14.29% for year one (7 yr MACRS), then the partnership gets $715 of depreciation for its half year of existence ($10,000 X 14.29% ÷ 2), and the sole proprietorship gets $714 of depreciation on the machine for the second half of 2011. In 2012, assuming the sole proprietorship continues to use the machine, it gets $2,449 for a depreciation deduction ($10,000 X 24.49%), and so on.

Thank you Bees Knees.

So if the ending date of the partnership is 3/31/2011 instead, does the partnership take 1/4 of the first year depreciation?

[Bees Knees]

Thank you Bees Knees.

So if the ending date of the partnership is 3/31/2011 instead, does the partnership take 1/4 of the first year depreciation?

Yes - Divide the depreciation based on the percentage of the time during the year that the partnership used the asset vs. the time the sole proprietor used the asset.

[Questionguy101]

Yes - Divide the depreciation based on the percentage of the time during the year that the partnership used the asset vs. the time the sole proprietor used the asset.

Thank you for the help!

[dsi]

Are X and Y husband and wife?