Have Tax Questions? Ask a Tax Expert for Answers ASAP
A partnership has individual municipal bonds among its assets. These bonds have an original cost basis, but brokerage firm that holds the bonds in custody also reports the cost basis on fixed income securities adjusted for amortization, accretion or principal pay downs. Does the partnership use the original cost basis to report the year-end inventory of these bonds or the adjusted cost basis?
Also, in the case of sales, redemptions and transfers, are capital gains calculated on the original basis, or on the adjusted basis?
Hi and welcome to JustAnswer:
Municipal bonds can never be sold at a loss if held to maturity, thus any premium paid for muni bond is amortized over the period until maturity. The amortization reduces the municipal interest income.If there is an original issue discount muni purchased, interest is accreted each year (and reported as muni interest income) so that the basis in bond ultimately reaches maturity value.Other muni bonds purchased at a market discount due to rate changes are held at cost until maturity and a capital gain is reported.When there is principal received on a bond, the basis is reduced.Gains/losses are determined on the adjusted basis.
I have also provided a link to a simple explanation of the various situations.
You only answered the second part of the question: capital gains/loss are determined on the adjusted basis. That's helpful, thanks.
But you didn't answer the first question, which is really the more pressing one right now.
How does a partnership, or any business entity, carry and report on form 1065 muni bonds, or other fixed income securities, on its balance sheet from year to year,
i) at the original cost basis
ii) does the carry value change each year in accordance with the adjusted cost basis?
I need a specific answer to that question, either i) or ii). Or perhaps something else.
I sorry you believe you received poor service by my response.
I did explain it in my first statements. The explanation wasn't just yes or no, it was why and how.
To put it another way, except for market discounts on muni bonds, the basis is adjusted for the accretion/amortization of discount/premium. Basis is also reduced by principal payments on the bonds.
So the direct answer to your question is - ii
Thank you for answering my tax question last week concerning the carrying value of individual bonds on a partnership balance sheet.
I also have to file form 3520-A. I was wondering if you also have expertise in that area, or know someone in this format who does.
I have tried to develop relationships with CPAs locally over the past few years, but have been highly unsatisfied, so I wind up doing it all myself, but get stuck on certain questions and points, so I seem to like this format where I can ask an expert concerning specific questions and points where I need help.
Okay, let's start with a very basic question.
A US person has a foreign grantor trust, whose income wholly passes through to the US grantor.
The trust has assets outside the US under its own name: let's call these assets the trust's "stand-alone" assets.
But the trust also owns 98% of a US domestic partnership which in turn has assets under its own name in the US and whose income also fully passes to the US grantor of the trust. This partnership files a normal 1065 partnership return and issues a K-1 to the US grantor.
On the 3520-A, does the trust report:
i) only its "stand-alone" assets and transactions,
ii) both its stand-alone accounts and 98% of the domestic partnership accounts.
If ii), then,
a) separately or
b) as one set of consolidated financial statements or
3) both stand-alone and consolidated accounts?
I hope the question is clear.