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Yes, you can have negative partner capital on a partnership tax return. Capital and basis are not the same. The capital is an accounting concept. Basis is a tax concept. Your basis consists of what you put in plus earnings less losses and distributions. Basis also includes your share of the partnership debt. Basis cannot be negative because you cannot deduct losses if your basis is 0. So those losses are included in the capital calculation but are suspended for basis.
I think I got it.
If, for example, there are two partners each of whom share 50% of all Profits, Loss, and Capital. On the very first day of the partnership's existence Partner A contributes $1000 into the partnership checking account and partner B contributes $10,000 into the partnership checking account. Then, by the end of the first year the partnership tax return (1065) reports a loss of $5000.
Will Partner A report capital of -$1,500 (i.e.$1,000 - $2,500) and have basis of zero?
Will Partner B report capital of $2,500 (i.e. $5,000 - $2,500) and have basis of $2,500?
How will Partner A's and B's capital and basis change if the partnership took a bank loan of $10,000 during the year.
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Correct on the calculations. Basis is such a hard concept to explain and you got it. One more comment on the calculation - Partner A only gets to deduct $1,000 of the allocated loss of 2,500. B gets to deduct the 2,500.
As for the bank loan - When a partnership borrows from the bank all partners are held liable for repayment. Because you are on the hook for the partnership debt you add your share of the partnership debt to your basis.
So partner A will now have a capital account of -$1,500 and a basis of $3,500. ($1,000 - $2,500 plus $5,000). A now gets to deduct the whole $2,500.
Partner B will have basis of $7,500 and a capital account of $2,500.