- What is Ann's adjusted basis in her partnership interest after accounting for the change in liabilities?
Answer: $70,000
An increase in a partner's share of partnership liabilities is treated as a cash contribution, which increases the partner's basis. The total increase in nonrecourse liabilities is $150,000−$90,000=$60,000. Ann's share of this increase is 1/3∗$60,000=$20,000. Her adjusted basis is her basis before the change ($50,000) plus her share of the liability increase ($20,000), for a total of ($70,000). - What is Dale's adjusted basis at the end of the year?
Answer: $50,000
A partner's basis is adjusted for their share of income and changes in liabilities. The decrease in partnership liabilities is treated as a cash distribution. Dale's share of the liability decrease is 25%∗$40,000=$10,000. His share of the ordinary income is 25%∗$80,000=$20,000. His ending basis is: Beginning basis ($40,000) + Share of income ($20,000) - Deemed distribution from liability decrease ($10,000) = ($50,000). - Which of the following events will cause a partner's adjusted basis in their partnership interest to decrease?
Answer: The partnership makes a charitable contribution.
A partner's basis is decreased by their distributive share of partnership losses and non-deductible expenses that are not capital expenditures. Charitable contributions are separately stated items that are non-deductible at the partnership level but flow through to the partners, decreasing their basis. Tax-exempt income and Section 1231 gains increase basis. Guaranteeing debt can increase a partner's share of recourse liabilities, which increases basis.
- Sara received a 25% interest in the capital and profits of the RST Partnership for services rendered. The fair market value of the partnership interest she received was $40,000. In addition, Sara's share of partnership liabilities at the time she was admitted was $15,000. How much income must Sara recognize, and what is her initial tax basis in the partnership interest?
Answer: $40,000 income; $55,000 basis
When a partnership interest is received for services, the fair market value of the interest is treated as compensation and is recognized as ordinary income by the partner. Therefore, Sara must recognize $40,000 of income. Her initial basis is the amount of income she recognizes ($40,000) plus her share of partnership liabilities ($15,000). Thus, her initial basis is $40,000+$15,000=$55,000. - What is Wendy's basis at the end of the year?
Answer: $80,000
First, calculate partnership net income: $100,000−$60,000=$40,000. Wendy's share is 50%∗$40,000=$20,000. The fine is a non-deductible expense that reduces partner basis. Wendy's share is 50%∗$10,000=$5,000. Wendy's ending basis is: Beginning basis ($80,000) + Share of income ($20,000) - Share of non-deductible fine ($5,000) - Cash distribution ($15,000) = ($80,000). - What is Dan's basis in the inventory he receives?
Answer: $40,000
In a non-liquidating distribution, basis is first reduced by any cash received. Dan's basis becomes $60,000−$20,000=$40,000. The basis of distributed property to the partner is the partnership's basis in that property, but it cannot exceed the partner's remaining basis in the partnership interest. The partnership's basis in the inventory is $50,000, but Dan's remaining basis is only $40,000. Therefore, Dan's basis in the inventory is limited to $40,000. - Which of the following items increases a partner's tax basis in their partnership interest but does not increase their Section 704(b) book capital account?
Answer: The partner's share of an increase in partnership nonrecourse liabilities.
A partner's tax basis is increased by their share of partnership liabilities. However, partnership liabilities are not considered part of a partner's capital account for book purposes under Section 704(b). Tax-exempt income, cash contributions, and ordinary income all increase both the partner's tax basis and their book capital account.
- What is Tom's initial basis in his partnership interest?
Answer: $20,000
A partner's basis is their contributed property's adjusted basis ($40,000), reduced by the total debt assumed by the partnership ($30,000), and increased by the partner's share of that debt. Tom's share of the debt is 1/3∗$30,000=$10,000. So, his basis is $40,000−$30,000+$10,000=$20,000. This is equivalent to taking the basis of the asset and subtracting the portion of the debt relieved, which is the share assumed by the other partners 2/3∗$30,000=$20,000, so $40,000−$20,000=$20,000. - What is Frank's adjusted basis in his partnership interest at the end of the year, before any distributions?
Answer: $145,000
First, calculate the partnership's ordinary income: $500,000 (revenue) - $300,000 (COGS) - $40,000 (guaranteed payment) = $160,000. Frank's distributive share is 30% × $160,000 = $48,000. Frank's basis is increased by his distributive share of partnership income ($48,000) and decreased by his distributive share of non-deductible expenses ($3,000 charitable contribution = 30% × $10,000). Beginning basis $100,000 + distributive share of income $48,000 - share of charitable contribution $3,000 = $145,000. Note: The guaranteed payment is separately reported as income to Frank but does not affect his partnership basis calculation.
- What is the maximum amount of the partnership loss that Marta can deduct on her personal tax return for the year, and what is her ending basis?
Answer: $40,000 loss; $0 basis
A partner's basis is first increased by income items and then decreased by losses. Marta's basis is first increased by her share of portfolio income: $35,000+(50%∗$10,000)=$40,000. Her share of the ordinary loss is 50%∗$90,000=$45,000. However, a partner can only deduct losses up to their basis. Therefore, Marta can deduct only $40,000 of the loss. Her basis is reduced to zero. The remaining $5,000 loss is suspended and can be carried forward indefinitely. - What is Karl's initial basis in his partnership interest?
Answer: $80,000
A partner's initial basis is the adjusted basis of property contributed plus their share of partnership liabilities. Karl contributed land with an adjusted basis of $60,000. His share of the $40,000 recourse loan is 50%, or $20,000. Therefore, Karl's initial basis is $60,000(landbasis)+$20,000(shareofliability)=$80,000. - Amy contributes inventory to a partnership in exchange for a 20% interest. The inventory has an adjusted basis of $10,000 and a fair market value of $15,000. The partnership has no liabilities. What is Amy's initial basis in her partnership interest and what is the partnership's basis in the inventory?
Answer: Amy's basis is $10,000; Partnership's basis is $10,000.
Generally, no gain or loss is recognized on a contribution of property to a partnership in exchange for a partnership interest. The partner's basis in the partnership interest (outside basis) is the adjusted basis of the property contributed. The partnership's basis in the contributed property (inside basis) is the same as the contributing partner's adjusted basis. Therefore, Amy's outside basis is $10,000, and the partnership's inside basis in the inventory is also $10,000.
- What is the amount of suspended loss Lisa can use in Year 2?
Answer: $1,000
In Year 1, Lisa's basis available to absorb losses is her beginning basis plus tax-exempt income: $12,000+$2,000=$14,000. She can deduct $14,000 of the $15,000 loss, reducing her basis to $0. A ($1,000) loss is suspended. In Year 2, she has $10,000 of ordinary income, which increases her basis from $0 to $10,000. This basis allows her to deduct the previously suspended loss. She can use the entire $1,000 suspended loss in Year 2. - What is the amount of loss from the partnership that Pat can deduct on his current year tax return?
Answer: $30,000
A partner's ability to deduct losses is limited to their basis in the partnership interest. The basis is adjusted for any changes in liabilities before applying the loss limitation. Pat's basis for loss limitation purposes is his beginning basis ($25,000) plus his share of the increase in liabilities ($5,000), which equals $30,000. Although his share of the loss is $35,000, he can only deduct up to his adjusted basis of $30,000. The remaining $5,000 loss is suspended.
- What is Kim's adjusted basis in her partnership interest at the end of the year?
Answer: $75,000
A partner's basis is increased by their share of both taxable and tax-exempt income and decreased by distributions. Kim's share of ordinary income is 50%∗$80,000=$40,000. Her share of tax-exempt income is 50%∗$10,000=$5,000. Her ending basis is calculated as: Beginning basis ($60,000) + Share of ordinary income ($40,000) + Share of tax-exempt income ($5,000) - Cash distribution ($30,000) = ($75,000). - What is Rick's basis in his partnership interest after the distributions?
Answer: $0
When a partnership makes distributions, cash is considered first. Rick's basis is first reduced by the cash distribution: $40,000−$15,000=$25,000. This becomes the remaining basis available for the property distribution. The partner's basis in the distributed property is the partnership's basis ($30,000), limited to the partner's remaining outside basis ($25,000). So, Rick takes a $25,000 basis in the property. His partnership basis is then reduced by the basis he takes in the property: $25,000−$25,000=$0. - What is Yasmine's adjusted basis in her partnership interest?
Answer: $100,000
A limited partner generally does not have an economic risk of loss for recourse liabilities, so they are not allocated any basis from them (unless they guarantee the debt). Nonrecourse liabilities are allocated to all partners, typically based on their profit-sharing ratio. Yasmine's basis is her initial basis ($50,000) plus her share of nonrecourse liabilities 50%∗$100,000=$50,000. Her total basis is $50,000+$50,000=$100,000. - What is Rick's basis in his partnership interest after the distributions?
Answer: $0
When a partnership makes distributions, cash is considered first. Rick's basis is first reduced by the cash distribution: $40,000−$15,000=$25,000. This becomes the remaining basis available for the property distribution. The partner's basis in the distributed property is the partnership's basis ($30,000), limited to the partner's remaining outside basis ($25,000). So, Rick takes a $25,000 basis in the property. His partnership basis is then reduced by the basis he takes in the property: $25,000−$25,000=$0. - What is Cobb's adjusted basis in his partnership interest at year-end?
Answer: $0
A partner's basis cannot be negative. First, adjust the partner's basis for changes in liabilities. Cobb's share of the debt increase is 25%∗$20,000=$5,000. His basis before considering the loss is $30,000+$5,000=$35,000. Next, account for his share of the loss, which is 25%∗$160,000=$40,000. The loss deduction is limited to his basis. Therefore, he can deduct $35,000 of the loss, which reduces his basis to $0. The remaining $5,000 loss is suspended and carried forward. - A new partner acquires a 25% interest in a partnership by contributing an asset with a basis of $50,000 and a fair market value of $100,000. The partnership has existing liabilities of $80,000, all of which are nonrecourse. What is the partner's initial outside basis?
Answer: $70,000
The partner's initial basis is the adjusted basis of the property contributed plus the partner's share of existing partnership liabilities. The basis of the contributed asset is $50,000. The partner's share of the nonrecourse liabilities is 25%∗$80,000=$20,000. Therefore, the partner's initial outside basis is $50,000+$20,000=$70,000.
