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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
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Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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So I have full understanding of outside basis - Outside

Resolved Question:

So I have full understanding of outside basis - Outside basis stops at zero each year even if the current year K1 Box 1 ordinary loss pushes this basis below zero. It is understood that the loss amount allowed to be taken is up to amount of outside basis. So if a contribution is made each year, the loss amount can be up to the amount contributed in the current year despite past year losses driving it below zero?
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

Lane :

No, as a practical matter, outside basis should be tracked yearly because basis is an accumulated amount from prior and current years and it may be difficult or impossible to compile the needed data when necessary.

Lane :

Generally, a partner’s outside basis starts with the partner’s initial basis in the partnership interest, and is adjusted for: (a) all subsequent contributions by the partner; (b) the partner’s share of the taxable income or loss of the partnership; (c) the partner’s share of the nontaxable income and nondeductible/non-capital expenses; and (d) the distributions from the partnership --up to the date that basis is determined

Lane :

And, of course, basis determination must be made whenever there is a possibility of a taxable event

Lane :

Also, any receipt of a partnership interest by providing services to the partnership is initially taxed as the receipt of compensation at fair market value, and this value becomes the opening basis in the interest.

Lane :

With respect to determining the gain or loss from the partial or complete disposition of the partnership interest, and with respect to determining the basis of any property received from the partnership as property distributions, outside basis should be determined immediately prior to the disposition or the distribution of the property.

Lane :

Increases in the partner’s share of partnership liabilities generally are treated as cash contributions by the partner, while decreases are treated as cash distributions to the partner. Complex rules govern the allocation of liabilities to partners.

Lane :

Outside basis adjustments are required on the date that contributions of property are made.

Lane :

And, likewise, adjustments are generally required on the date that distributions take place.

Lane :

There is an important exception for distributions that are merely advances or drawings against a partner’s distributive share of income for that year: these are treated as current distributions made on the last day of the partnership’s taxable year.

Lane :

But, to answer your question: ... And this is a LITTLE different from the way you expressed it, it's not that it stops at zero each year ... It's NEVER reduced below zero

Lane :

See this, from AICPA:

Lane :

The partner’s initial basis is determined pursuant to Internal Revenue Code1 sections 722 or 742 depending on how the partner acquired the interest (i.e. by contribution or by acquisition). First, the initial basis is increased under section 705(a)(1) for (a) subsequent contributions, and (b) the partner’s share of the partnership taxable and tax-exempt income. Then, the partner’s basis is decreased under sections 705(a)(2) and (a)(3) by (a) the amount of cash distributions and (b) the adjusted basis of any property distributions. The partner’s outside basis is further reduced by the partner’s share of the losses and non-deductible/non-capital expenses. Outside basis is never reduced below zero.



1 All references to the word “section” in this guide reference the Internal Revenue Code unless otherwise noted.


Lane :

Sory for the data dump, but I wanted to give this to you context, and give you something for the files

Lane :

If this HAS helped, I would appreciate a feedback rating of 3 (OK) or better … That's the only way they will pay us here.


HOWEVER, if you need more on this, PLEASE COME BACK here, so you won't be charged for another question.

Lane :

Hope this has helped

Lane :

Lane

Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4357
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and other Tax Specialists are ready to help you
Expert:  Lane replied 1 year ago.
Our chat has ended, but you can still continue to ask me questions here until you are satisfied with your answer. Come back to this page to view our conversation and any other new information.

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If you haven’t already done so, please rate your answer above. Or, you can reply to me using the box below.
Expert:  Lane replied 1 year ago.


Hi Peg,

Finally had a chance to dig in a little.

Of this one, I'm sure

Lane

Expert:  Lane replied 1 year ago.

As I was trying to look at this las night I stumbled into this.

An excellent overview:

https://app.box.com/s/3zekpxqqlecxbvk4opui

Lane
Expert:  Lane replied 1 year ago.

Thanks Peg,

Sorry it took this long.

(Learning is good)!

Lane

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Lane
Lane
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Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986