19.2 Partner's Basis Calculation
Key Takeaways
Outside basis is adjusted annually for income, losses, distributions, and contributions.
The ordering rule: (1) income increases, (2) decreases for distributions, (3) decreases for losses.
Partnership liabilities increase partner basis—critical for loss deductions.
Recourse debt: allocated by economic risk of loss. Nonrecourse: by profit-sharing ratios.
Losses cannot reduce basis below zero; excess losses are suspended.
Tax-exempt income increases basis; nondeductible expenses decrease basis.
Why This Matters for the Exam
Partner basis is a core partnership topic. It determines loss deductibility, distribution taxation, and gain on sale. Master the ordering rules and debt allocation.
Annual Basis Adjustments
Partner's outside basis changes every year:
| Increases | Decreases |
|---|---|
| Additional contributions | Distributions received |
| Share of taxable income | Share of losses |
| Share of tax-exempt income | Share of nondeductible expenses |
| Increase in share of liabilities | Decrease in share of liabilities |
The Ordering Rules (Critical!)
The adjustments occur in this specific order:
| Order | Adjustment |
|---|---|
| 1 | Increase for income items |
| 2 | Decrease for distributions |
| 3 | Decrease for losses and deductions |
Why Order Matters: Income is added first, which may allow larger tax-free distributions or more loss deductions.
Basis Floor Rule
| Rule | Description |
|---|---|
| Cannot go below zero | Basis floor is $0 |
| Excess losses | Suspended indefinitely |
| Future basis | Deduct when basis restored |
Partnership Liabilities and Basis
A partner's share of partnership debt increases their outside basis:
| Why This Matters | Effect |
|---|---|
| Loss deductions | More basis = deduct more losses |
| Distributions | More basis = tax-free distributions |
| Leverage | Partners get basis without contributing cash |
Recourse vs. Nonrecourse Debt
| Debt Type | Allocation Rule |
|---|---|
| Recourse | Partner who bears economic risk of loss |
| Nonrecourse | Profit-sharing ratios (generally) |
| Qualified nonrecourse | Special rules for real estate |
Recourse Debt Example
| Scenario | Allocation |
|---|---|
| Partnership borrows $100,000 | |
| Partner A guarantees the loan | |
| Allocation | 100% to Partner A |
Nonrecourse Debt Example
| Scenario | Allocation |
|---|---|
| Partnership borrows $100,000 (nonrecourse) | |
| Partner A: 40% profit interest | |
| Partner B: 60% profit interest | |
| Partner A share | $40,000 |
| Partner B share | $60,000 |
Basis Adjustment Example
| Transaction | Amount | Running Basis |
|---|---|---|
| Beginning basis | $50,000 | |
| + Share of income | $30,000 | $80,000 |
| + Tax-exempt interest | $5,000 | $85,000 |
| - Distribution | ($20,000) | $65,000 |
| - Share of loss | ($40,000) | $25,000 |
| Ending basis | $25,000 |
Loss Limitation Example
| Scenario | Amount |
|---|---|
| Partner basis | $20,000 |
| Share of partnership loss | $35,000 |
| Deductible loss | $20,000 |
| Suspended loss | $15,000 |
| Ending basis | $0 |
Real-World Scenario
Scenario: Partner has $50,000 basis. Partnership allocates $30,000 income and $10,000 tax-exempt interest. Partner receives $25,000 distribution.
- Step 1: Add income: $50,000 + $30,000 + $10,000 = $90,000.
- Step 2: Subtract distribution: $90,000 - $25,000 = $65,000.
- Ending basis: $65,000.
On the Exam
Question types to practice on basis:
- Calculation Questions: "What is the partner's ending basis?"
- Loss Limit Questions: "How much loss can the partner deduct?"
- Debt Questions: "How is nonrecourse debt allocated?"
- Order Questions: "What is the order of basis adjustments?"
The key is to remember: Order: income → distributions → losses. Losses limited to basis. Recourse = economic risk. Nonrecourse = profit ratios.
Partner D has $50,000 basis. Partnership allocates $30,000 income and $10,000 tax-exempt interest. Partner receives $25,000 distribution. Ending basis?
$50,000
$65,000
$55,000
$45,000
Partner has $20,000 basis. Partnership allocates $35,000 loss. How much can partner deduct?
$35,000
$20,000
$15,000
$0
Which type of partnership debt is allocated by profit-sharing ratios?
Recourse debt
Nonrecourse debt
All partnership debt
Personal loans
Sections you finish are checked off in the contents.