Question

Which of the following statements is always correct regarding assets acquired by a newly formed partnership? If a partner contributes:

1) Land valued at less than its basis: the partnership reports a § 1231 loss if the property is sold at a loss.
2) Depreciable property: the partnership treats the property as newly acquired depreciable property, and may claim a § 179 deduction.
3) Unrealized (cash-basis) receivables: the partnership will report a capital gain when the receivable is collected.
4) Inventory (in the partner's hands): the partnership reports ordinary income if the property is held as a capital asset and sold within five years of the contribution date.
5) All of these statements are always true.

Answer 1

Of the provided options for assets acquired by a newly formed partnership, only the treatment of depreciable property is always true; partners may claim a Section 179 deduction on it. Other statements depend on circumstances and tax provisions. Partnerships have advantages like little regulation and flexible capital but also disadvantages like shared liability and limited life.

Step-by-step explanation:

When assets are acquired by a newly formed partnership, the treatment of those assets for tax and accounting purposes varies based on the type of asset contributed. Of the options provided, the second option is always correct: when a partner contributes depreciable property, the partnership considers this property as newly acquired depreciable property, and may claim a Section 179 deduction for it, subject to certain limitations and elections. However, the other statements are not always true. For example, contributed land valued at less than its basis does not always result in a § 1231 loss upon sale, as it depends on the nature of the loss and use of the property. Unrealized receivables, when collected, generally result in ordinary income, not a capital gain. Inventory contributed by a partner retains its character, and if sold within five years, the partnership typically reports the income as ordinary, not as income from a capital asset.

Regarding partnerships in general, they have different advantages including being subject to little government regulation, the ability to raise more capital than sole proprietorships due to greater assets being contributed, and tax advantages since the partners pay taxes on their income, and the business itself is not taxed at the partnership level.

However, partnerships also have specific disadvantages, such as the partners being responsible for each other's acts, limited life of the business, and personal liability for all owners. These disadvantages are mitigated in a limited liability partnership, where the partners' liabilities for the business's debts are limited to their investment in the company.