Keeping Track of your Partnership Basis

For Partnership Basis:

Of course everything is great and peachy if you’re partnership is growing and making money, you’re basis increases and there is little to worry about, but what if you’re partnership takes a hit for the year and losses are incur, then what?

You have to look at three things:

Outside Basis –

At Risk Basis –

if the partner materially participated or not –
IF ALL THREE REQUIREMENTS ARE MET, THEN PARTNERSHIP LOSSES ARE DEDUCTIBLE.

Outside Basis:

Outside Basis or Partner’s Adjusted basis in partnership interest – refers to a partner’s investment in a partnership. outside basis is determined without considering any amount shown in the partnership books as capital, equity or similar account. When a partner disposes of an interest in a partnership, the difference between the sale price and the partner’s outside basis is the taxable gain or loss. Each partner is responsible for keeping track of his or her outside basis.

Additions to Basis:
– Cash contribution
– Partner’s adjusted basis of property contributed to partnership.
– Taxable gains the partner recognizes on the contribution of property.
– Liabilities the partner assumes and increases in partnership liabilities.
– Taxable income of a partnership including capital gains.
– Tax-exempt income of partnership.
– Depletion deductions in excess of basis.

Subtractions from basis:
– Liabilities of the partner that the partnership assumes.
– Decreases in partnership liabilities.
– Partnership losses including capital losses.
– nondeductible partnership expenses that are not capital expenditures.
– Distributive share of Section 179 expense even if partner is not allowed the full deduction in one year due to limitation.
– Adjusted basis of partnership property distributed to the partner.
– Cash withdrawals
– Depletion deductions for oil and gas wells.

Initial Basis:

A partner’s initial basis in his partnership interest depends upon the method of acquisition.

• If a partner acquires the interest in exchange for a contribution to the partnership, his basis equals the amount of cash plus his basis in any property contributed to the partnership.
• If  A partner’s basis in an interest he receives in exchange for services equals the amount of compensation income he receives. The receipt of a partnership interest in exchange for the performance of services, or for a promise to perform services, is taxable in the amount of the value of the partnership interest received.
•  If the partner purchases his partnership interest, his basis equals the amount of money plus the fair market value of other property given in exchange for the interest. The basis of an interest acquired from a decedent prior to January 1, 2010 is its fair market value at the time of death or at the alternate valuation date. After 2009, the basis will be a modified carryover basis. The basis for determining gain in an interest acquired by gift is the donor’s basis in the interest increased by any federal gift taxes he paid. For determining a loss, it is the lesser of the donor’s basis or its fair market value.

The basis to the partnership of property contributed by a partner is the adjusted basis of such property in the hands of the contributing partner at the time of the contribution and any gain he recognized on the transfer to the partnership under Code Sec. 721(b) ( Code Sec. 723). ¹¹⁹ However, it has been held that the basis of a nonbusiness asset (for example, a personal automobile) converted to a business asset upon contribution to a partnership was its fair market value at the time of contribution ( L.Y.S. Au, CA-9, 64-1 ustc ¶9447). ¹²⁰ The holding period of a contributed asset includes the period during which it was held by the contributing partner ( Reg. §1.723-1). ¹²¹

At Risk Basis:

The deduction of a loss from an activity is generally limited to the amount the taxpayer has at risk in the activity. Most activities carried on as a trade or business or for the production of income are subject to this at-risk limitation.

Generally, the amount a taxpayer has at risk in an activity is equal to any amount of money or property contributed to the activity plus any amount borrowed for use in the activity on which the taxpayer is personally liable or has pledged security.

A taxpayer is at risk in an activity for the following amounts:

Non-recourse financing is a loan for which the taxpayer is not personally liable. If a taxpayer borrows funds to use in an activity and the lender’s only recourse is against the taxpayer’s interest in the activity or the property used in the activity, then the taxpayer is not personally liable on the loan, the loan is considered a non-recourse loan, and the taxpayer is not considered at risk for any portion of the loan used in the activity (unless the loan is otherwise secured by property not used in the activity).

A taxpayer’s amount at risk in an activity is increased by the amount of personal funds the taxpayer contributes to the activity. For this purpose, a contribution by a partner to a partnership conducting only one activity is a contribution to the activity. However, a partner’s amount at risk is not increased by the amount that the partner is required under the partnership agreement to contribute until the contribution is actually made. A partner’s amount at risk is increased in the case of a note payable to the partnership for which a partner is personally liable only when the proceeds of the note are actually devoted to the activity. A taxpayer’s amount at risk in an activity is decreased by the amount of money withdrawn from the activity by or on behalf of the taxpayer. Amounts withdrawn from an activity include distributions from a partnership or an S corporation.