Form 541 - Partnerships - Department Of Treasury Internal Revenue Service

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see Effect of Partnership Liabilities under Basis

They do not jointly sell services or the

Testing day. The partnership determines

of Partner’s Interest, later.

property produced or extracted. Each sep-

if there is a majority interest tax year on the

arate participant can delegate authority to

The same rules apply if an LLC classified as

testing day, which is usually the first day of

sell his or her share of the property pro-

a partnership is converted into a partnership.

the partnership’s current tax year.

duced or extracted for the time being for

Change in tax year. If a partnership’s

his or her account, but not for a period of

IRS e-file (Electronic Filing)

majority interest tax year changes, it will not

time in excess of the minimum needs of

be required to change to another tax year

the industry, and in no event for more than

for 2 years following the year of change.

one year.

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Principal partner. If there is no majority

However, this exclusion does not apply to an

interest tax year, the partnership must use

unincorporated organization one of whose prin-

the tax year of all its principal partners. A

cipal purposes is cycling, manufacturing, or

Certain partnerships with more than 100

principal partner is one who has a 5% or

processing for persons who are not members of

partners are required to file Form 1065, Sched-

more interest in the profits or capital of the

the organization.

ules K – 1, and related forms and schedules

partnership.

electronically (e-file). Other partnerships gener-

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Electing the exclusion. An eligible organiza-

ally have the option to file electronically. For

Least aggregate deferral of income. If

tion that wishes to be excluded from the partner-

details about IRS e-file, see the Form 1065 in-

there is no majority interest tax year and

ship rules must make the election not later than

structions.

the principal partners do not have the

the time for filing the partnership return for the

same tax year, the partnership generally

first tax year for which exclusion is desired. This

must use a tax year that results in the

filing date includes any extension of time. See

least aggregate deferral of income to the

Exclusion From

section 1.761 – 2(b) of the regulations for the

partners.

procedures to follow.

Partnership Rules

Least aggregate deferral of income. The tax

year that results in the least aggregate deferral

Certain partnerships that do not actively conduct

Tax Year

of income is determined as follows.

a business can choose to be completely or par-

tially excluded from being treated as partner-

1) Figure the number of months of deferral

Taxable income is figured on the basis of a tax

ships for federal income tax purposes. All the

for each partner using one partner’s tax

year. A “tax year” is the accounting period used

partners must agree to make the choice, and the

year. Count the months from the end of

for keeping records and reporting income and

partners must be able to compute their own

that tax year forward to the end of each

expenses.

taxable income without computing the

other partner’s tax year.

partnership’s income. However, the partners are

Partnership. A partnership determines its tax

not exempt from the rule that limits a partner’s

2) Multiply each partner’s months of deferral

year as if it were a taxpayer. However, there are

distributive share of partnership loss to the ad-

figured in step (1) by that partner’s interest

limits on the year it can choose. In general, a

justed basis of the partner’s partnership interest.

in the partnership profits for the year used

partnership must use its required tax year. A

Nor are they exempt from the requirement of a

in step (1).

required tax year is a tax year that is required

business purpose for adopting a tax year for the

under the Internal Revenue Code and Income

3) Add the results in step (2) to get the total

partnership that differs from its required tax

Tax Regulations. For a partnership, the required

deferral for the tax year used in step (1).

year, discussed under Tax Year, later.

tax year is the tax year determined under section

4) Repeat steps (1) through (3) for each

706 of the Internal Revenue Code and section

Investing partnership. An investing partner-

partner’s tax year that is different from the

1.706 of the regulations. See Required Tax

ship can be excluded if the participants in the

other partners’ years.

Year, later. Exceptions to this rule are discussed

joint purchase, retention, sale, or exchange of

under Exceptions to Required Tax Year, later.

investment property meet all the following re-

The partner’s tax year that results in the

quirements.

lowest total number in step (3) is the tax year

Partners. Partners can change their tax year

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that must be used by the partnership. If the

They own the property as co-owners.

only if they receive permission from the IRS.

calculation results in more than one year qualify-

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This also applies to corporate partners, who are

They reserve the right separately to take

ing as the tax year that has the least aggregate

usually allowed to change their accounting peri-

or dispose of their shares of any property

deferral, the partnership can choose any one of

ods without prior approval if they meet certain

acquired or retained.

those tax years as its tax year. However, if one

conditions.

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of the years that qualifies is the partnership’s

They do not actively conduct business or

existing tax year, the partnership must retain

irrevocably authorize some person acting

Closing of tax year.

Generally, the

that tax year.

in a representative capacity to purchase,

partnership’s tax year is not closed because of

sell, or exchange the investment property.

the sale, exchange, or liquidation of a partner’s

Example. Rose and Irene each have a 50%

Each separate participant can delegate

interest, the death of a partner, or the entry of a

interest in a partnership that uses a fiscal year

new partner. However, if a partner sells, ex-

authority to purchase, sell, or exchange

ending June 30. Rose uses a calendar year

changes, or liquidates his or her entire interest,

his or her share of the investment property

or a partner dies, the partnership’s tax year is

while Irene has a fiscal year ending November

for the time being for his or her account,

but not for a period of more than a year.

closed for that partner. See Distributive share in

30. The partnership must change its tax year to

year of disposition under Partner’s Income or

a fiscal year ending November 30 because this

Loss, later.

results in the least aggregate deferral of income

Operating agreement partnership. An oper-

to the partners. This was determined as shown

ating agreement partnership group can be ex-

Required Tax Year

in the following table.

cluded if the participants in the joint production,

extraction, or use of property meet all the follow-

A partnership generally must conform its tax

Year

Months Interest

ing requirements.

year to its partners’ tax years. The rules for

End

Year

Profits

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12/31:

End

Interest Deferral Deferral

They own the property as co-owners, ei-

determining the required tax year are as follows.

ther in fee or under lease or other form of

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Majority interest tax year. If one or more

Rose . .

12/31

0.5

-0-

contract granting exclusive operating

partners having the same tax year own an

rights.

Irene . .

11/30

0.5

5.5

interest in partnership profits and capital of

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They reserve the right separately to take

more than 50% (a majority interest), the

Total Deferral . . . . . . . . . . . . . .

5.5

in kind or dispose of their shares of any

partnership must use the tax year of those

property produced, extracted, or used.

partners.

Page 4

Form 541 - Partnerships - Department Of Treasury Internal Revenue Service - 2002 Page 4

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