Where do you enter tax-exempt income on a partnership return?

[joshuabarksatlcs]

Screen 27 (for 2020), Sch M-1/M-3. 

Book/Tax difference; Tax exempt income; Non-deductible expenses... etc.

[joshuabarksatlcs]

Just opened 2021 to check.  Screen 27 also.

[DENP]

I'm sorry, I meant to say non-taxable income, not tax-exempt income.

[George4Tacks]

Please clarify the difference between the two. 

What is the source of this non-taxable income? Is it a non taxable dividend? PPP loan forgiven? We need to know the flavor before we can help with anything other than the excellent answers provided by @joshuabarksatlcs 

[DENP]

As I understand it, tax-exempt income is usually income that is derived from various investments that IRS or the government has some law that specifically exempts that income from taxation, such as income from municipal bonds.  What I am looking at is income from rebates that credit cards issue based upon a certain percentage of your purchases, which I remember reading is non-taxable per the IRS.

[DENP]

I am putting it under Other Schedule K Items - under Other income or (loss) in 22.1.

[George4Tacks · Accepted solution]

I believe that businesses need to treat this as a reduction in the cost of the purchases made with these cards. I believe that for a business, this is either an "Other Income" or "Reduction in Purchases". It is not a tax free, tax exempt, or in any way free of being taxed. 

https://www.investopedia.com/ask/answers/110614/are-credit-card-rewards-considered-taxable-income-ir...

[DENP]

It is considered taxable, if the expensed item is not reduced.  Here is what I found from IRS as a ruling:

Internal Revenue Service Department of the Treasury
Washington, DC 20224
Number: 201027015
Release Date: 7/9/2010
Index Number: 170.01-00
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Third Party Communication: None
Date of Communication: Not Applicable
Person To Contact:
------------------, ID No. -----------------
Telephone Number:
---------------------
Refer Reply To:
CC:ITA:B01
PLR-141607-09
Date:
April 05, 2010
Legend
Taxpayers = ---------------------------------------------------------------------------------------------------
--------
Company = ----------------------------------------------------------------------------------------------------
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Dear --------------------------------:
This responds to your letter dated September 11, 2009, in which you request rulings
related to §§ 61 and 170 of the Internal Revenue Code.
RULINGS REQUESTED
The following rulings are requested:
(1) The portion of the credit card purchases that Taxpayers can either receive back in
cash or request Company to pay to a charity does not constitute gross income under
§ 61;
(2) The amount that Taxpayers elect not to receive in cash but, pursuant to their
request, is paid by Company to a charity is a charitable contribution under § 170; and
(3) The sample written acknowledgment submitted with Taxpayers’ ruling request may
satisfy the recordkeeping and substantiation requirements of § 170(f).
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PLR-141607-09 2
FACTS
Taxpayers are individuals who will acquire credit cards issued by a bank through an
arrangement promoted by Company. Taxpayers will make purchases with the credit
cards and, as a result of those purchases, will be entitled to receive rebates. The
rebates are based on a percentage of Taxpayers’ credit card purchases (usually 1%)
and reduced by fees charged by Company (e.g., administrative and marketing). The
percentage of Taxpayers’ credit card purchases, less fees, equals the amount of the
rebate to which Taxpayers are entitled ($X). Taxpayers will have the option of receiving
cash in the amount of $X or, in the alternative, will have the option of allowing Company
to pay the $X to a charity that Taxpayers choose from a list of participating charities, all
of which are organizations described in § 170(c) (“charity”). The option to receive
rebates in cash or have the rebates paid to a charity is made at the time Taxpayers
open the credit card account. However, Taxpayers may change their option at any time
by contacting Company.
The sample written acknowledgment provided in Taxpayers’ submission is in the form of
a letter, with the charity’s name and address along with the date of the letter in the
letterhead, and states:
Dear Contributor:
This letter is to acknowledge your contribution made to the __________,
an organization described in section 501(c)(3) of the Internal Revenue Code and
qualified to receive contributions deductible for federal income tax purposes,
provided the contribution is made exclusively for charitable purposes.
We appreciate your contribution of $_______ made in calendar year ____
and wish to confirm for you that no goods or services were provided to you in
consideration, in whole or in part, for your contribution.
Sincerely,
__________________
Taxpayers’ proposed transaction:
Taxpayers plan to make purchases with credit cards issued by Company. Taxpayers
will elect not to receive $X in cash in favor of allowing Company to pay the $X to a
charity chosen by Taxpayers. Taxpayers’ contribution of $X will be acknowledged by
the charity with a written acknowledgment that contains the information in the sample
written acknowledgment.
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PLR-141607-09 3
LAW AND ANALYSIS
Section 61 provides that gross income means all income from whatever source derived.
A rebate received by a buyer from the party to whom the buyer directly or indirectly paid
the purchase price for an item is an adjustment in purchase price, not an accession to
wealth, and is not includible in the buyer’s gross income. See Rev. Rul. 76-96, 1976-1
C.B. 23, as modified by Rev. Rul. 2005-28, 2005-1 C.B. 997.
A deduction for contributions and gifts to or for the use of organizations described in
§ 170(c) will be allowed to the extent payment of the charitable contribution is made
within the taxable year. Sec. 170(a). A charitable contribution must be made voluntarily
and with donative intent. U.S. v. American Bar Endowment, 477 U.S. 105 (1986).
Deductions for charitable contributions are limited to a percentage of the taxpayer’s
contribution base for the taxable year. See § 170(b). No deduction is allowed under
§ 170(a) unless the donor properly substantiates the contribution as required under
§ 170(f)(8) (relating to contributions of $250 or more) and (17) (relating to all
contributions of a cash, check, or other monetary gift, regardless of amount), as
applicable.
Pursuant to section 170(f)(8), no deduction is allowed for any contribution of $250 or
more unless the taxpayer substantiates the contribution by a contemporaneous written
acknowledgment of the contribution by the donee organization. Sec. 170(f)(8)(A). In
the case of a cash contribution, the acknowledgment must: (1) include the amount of
cash contributed, (2) state whether the donee organization provided any goods or
services in consideration, in whole or in part, for the contribution, and (3) be obtained by
the taxpayer on or before the earlier of: (a) the date on which the taxpayer files a return
for the year in which the contribution was made or (b) the due date including extensions
for filing such return.
In addition to meeting the requirement for obtaining a contemporaneous written
acknowledgment for any contribution of $250 or more, a taxpayer that makes any cash,
check, or other monetary contribution must maintain as a record of the contribution a
bank record (e.g., a canceled check) or a written communication from the donee
showing: (1) the name of the donee organization, (2) the date of the contribution, and
(3) the amount of the contribution. Sec. 170(f)(17). The substantiation and
recordkeeping requirements of § 170(f)(8) and (17) may be satisfied by a single
document if the document contains all information required by both sections within the
time period as may be required.
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PLR-141607-09 4
Ruling request (1)—Rebate from Company:
Taxpayer first asks us to rule that, if Company gives Taxpayers the option to receive a
cash rebate of $X but Taxpayers request that Company pay the $X to a charity,
Taxpayers will not be in receipt of gross income under § 61.
A rebate received from the party to whom the buyer directly or indirectly paid the
purchase price for an item is an adjustment to the purchase price paid for the item. It is
not an accession to wealth and is not includible in the buyer’s gross income. See Rev.
Rul. 76-96, 1976-1 C.B. 23, as modified by Rev. Rul. 2005-28, 2005-1 C.B. 997.
In this case, Taxpayers make purchases using their credit cards and have the option to
receive a cash rebate of $X. In lieu of receiving cash, Taxpayers may allow Company
to pay the $X rebate to a charity. In either case, this rebate constitutes an adjustment to
the purchase price of the items purchased with Taxpayers’ credit cards and,
consequently, is not includible in Taxpayer’s gross income.
Ruling request (2)—Contribution:
Taxpayer also asks us to rule that, if Taxpayer elects to allow Company to pay to a
charity the $X Taxpayer could have received in cash, $X will be a charitable contribution
under § 170.
Taxpayer in this case may elect to receive a rebate in cash or to allow Company to pay
the amount of the rebate to a charity. This arrangement, therefore, is distinguishable
from the program in American Bar Endowment. The opportunity for Taxpayer to elect
whether rebates will be paid to a charity or received in cash by Taxpayer renders the
payments in this situation voluntary.
Accordingly, if Taxpayer chooses the option of allowing Company to pay to a charity the
$X and complies with all other requirements under § 170, then Taxpayer is treated as
making a charitable contribution in the amount of $X on the date Company remits
payment to the charity.
Ruling request (3)—Written acknowledgment
Finally, Taxpayers ask us to rule that the sample written acknowledgment submitted
with Taxpayers’ ruling request satisfies the recordkeeping and substantiation
requirements of § 170(f).
Provided the written acknowledgment in this case is accurate and is contemporaneously
obtained by Taxpayers, such acknowledgment may satisfy the substantiation
requirements of § 170(f)(8). The sample written acknowledgment: (1) is from the
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PLR-141607-09 5
donee organization, (2) includes the amount of cash contributed, and (3) states that no
goods or services were provided in exchange for the contribution. However, the
recordkeeping requirements of § 170(f)(17) require: (1) the name of the donee
organization, (2) the amount of the contribution, and (3) the date of the contribution, not
merely the calendar year of such contribution.
Therefore, to the extent the written acknowledgment in this case does not include the
date Company remits the contribution amount to the charity, such acknowledgment will
not satisfy the recordkeeping requirements of § 170(f)(17).
CONCLUSIONS
(1) The portion of the credit card purchases that Taxpayers can either receive back in
cash or request Company to pay to a charity does not constitute gross income to
Taxpayers under § 61.
(2) The amount that Taxpayers can receive in cash from Company but instead direct
Company to pay to a charity constitutes a charitable contribution on the date the amount
is received by the charity.
(3) For the reason stated above, the sample written acknowledgment provided in
Taxpayers’ submission does not satisfy the recordkeeping requirement of § 170(f)(17).
The charitable contributions that are the subject of this ruling request will be deductible
only if all requirements under § 170 (including substantiation requirements under
§ 170(f)(8) and (17)) are met, subject to the percentage limitations of § 170(b).
The rulings contained in this letter are based upon information and representations
submitted by Taxpayers and accompanied by a penalty of perjury statement executed
by an appropriate party. This office has not verified any of the material submitted in
support of the request for rulings. The facts are subject to verification on examination.
Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter. In particular, no inference should be made concerning the tax consequences
to Company.
This ruling is directed only to the taxpayers requesting it. Section 6110(k)(3) of the
Code provides that it may not be used or cited as precedent.
In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.
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PLR-141607-09 6
A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.
Sincerely,
Karin Goldsmith Gross
Senior Technical Reviewer, Branch 1
(Income Tax & Accounting)

[George4Tacks]

"the purchase price for an item is an adjustment in purchase price, not an accession to
wealth, and is not includible in the buyer’s gross income."

Since you have adjusted the purchase price of your cost of goods sold, supplies, etc. you really do not have to make any entry on the balance sheet. If you have not adjusted the purchase price, then you do have an income to enter as "Other Income" = "Taxable rebates".

[DENP]

Just as I stated earlier.