CPA Quiz: Determine Partnership Basis And Capital Accounts
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Determine Partnership Basis And Capital AccountsQuestion 1 of 20

EF LLC (taxed as a partnership) has two equal partners, E and F. On January 1, E contributes $30,000 cash and F contributes services with an agreed value of $30,000 in exchange for a 50% capital and profits interest. Capital accounts are maintained under Treasury Regulations §1.704-1(b)(2)(iv), and the LLC has no liabilities. Which item affects F's capital account but not F's outside basis at formation under Internal Revenue Code §722?

The $30,000 value of services credited to F's capital account
The partnership's inside basis in contributed property under Internal Revenue Code §723
E's $30,000 cash contribution
F's share of partnership liabilities under Internal Revenue Code §752
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CPA Quiz: Determine Partnership Basis And Capital Accounts

Practice Determine Partnership Basis And Capital Accounts in CPA with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

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This quiz focuses on Determine Partnership Basis And Capital Accounts, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA.

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Question 1

EF LLC (taxed as a partnership) has two equal partners, E and F. On January 1, E contributes $30,000 cash and F contributes services with an agreed value of $30,000 in exchange for a 50% capital and profits interest. Capital accounts are maintained under Treasury Regulations §1.704-1(b)(2)(iv), and the LLC has no liabilities. Which item affects F's capital account but not F's outside basis at formation under Internal Revenue Code §722?

  1. The $30,000 value of services credited to F's capital account (correct answer)
  2. The partnership's inside basis in contributed property under Internal Revenue Code §723
  3. E's $30,000 cash contribution
  4. F's share of partnership liabilities under Internal Revenue Code §752
Explanation: Internal Revenue Code §722 establishes a partner's basis from contributions, excluding services which are not 'property' under §721. F contributes services valued at $30,000, credited to capital but not increasing outside basis, as services trigger income recognition under §83 but basis remains zero per §722. The $30,000 affects capital but not basis, aligning with the distinction between book capital and tax basis. Choices B, C, and D are incorrect as they involve property basis or liabilities, which do not apply to services. Specifically, choice C relates to E's cash, not F's basis. Professionals must differentiate capital account credits from tax basis adjustments, especially for non-property contributions. A key rule is that basis from services is zero unless cash or property is also contributed, with value taxed as income.

Question 2

At the beginning of the year, Kim's adjusted basis in her K&L partnership interest was $60,000. Kim has a 50% interest in partnership profits and losses. During the year, the partnership generated $80,000 in ordinary business income and $10,000 in tax-exempt interest income. The partnership also made a $30,000 cash distribution to Kim.

What is Kim's adjusted basis in her partnership interest at the end of the year?

  1. $65,000
  2. $70,000
  3. $75,000 (correct answer)
  4. $105,000
Explanation: 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=80,000 = 40,000). Her share of tax-exempt income is (50% * 10,000=10,000 = 5,000). Her ending basis is calculated as: Beginning basis (60,000)+Shareofordinaryincome(60,000) + Share of ordinary income (40,000) + Share of tax-exempt income (5,000)−Cashdistribution(5,000) - Cash distribution (30,000) = ($75,000).

Question 3

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?

  1. $25,000 income; $25,000 basis
  2. $40,000 income; $40,000 basis
  3. $40,000 income; $55,000 basis (correct answer)
  4. $55,000 income; $55,000 basis
Explanation: 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 40,000ofincome.Herinitialbasisistheamountofincomesherecognizes(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).

Question 4

The ABC Partnership has three equal partners: Ann, Ben, and Carl. At the beginning of the year, the partnership had a nonrecourse liability of $90,000. During the year, the partnership's nonrecourse liabilities increased to $150,000. Ann's basis in her partnership interest before accounting for the liability change was $50,000.

What is Ann's adjusted basis in her partnership interest after accounting for the change in liabilities?

  1. $50,000
  2. $60,000
  3. $70,000 (correct answer)
  4. $100,000
Explanation: 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 (150,000−150,000 - 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).

Question 5

Marta is a 50% partner in the MT Partnership. At the start of the year, her basis was $35,000. During the year, the partnership incurred a $90,000 ordinary loss. The partnership also had $10,000 of portfolio income. The partnership made no distributions during the year.

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?

  1. $35,000 loss; $0 basis
  2. $40,000 loss; $0 basis (correct answer)
  3. 45,000loss;(45,000 loss; (5,000) basis
  4. $45,000 loss; $0 basis
Explanation: 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%∗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.

Question 6

Paul, a partner in the PQR partnership, has an adjusted basis of $70,000 in his interest. The partnership makes a non-liquidating distribution to Paul of a parcel of land. The land has an adjusted basis to the partnership of $80,000 and a fair market value of $100,000.

What is Paul's basis in the land after the distribution, and what is his remaining basis in the partnership interest?

  1. $70,000 in land; $0 in partnership interest (correct answer)
  2. 80,000inland;(80,000 in land; (10,000) in partnership interest
  3. $80,000 in land; $0 in partnership interest
  4. 100,000inland;(100,000 in land; (30,000) in partnership interest
Explanation: In a non-liquidating distribution of property, the partner's basis in the distributed property is the same as the partnership's basis (a carryover basis), but it cannot exceed the partner's basis in the partnership interest. Here, the partnership's basis in the land (80,000)isgreaterthanPaul′soutsidebasis(80,000) is greater than Paul's outside basis (70,000). Therefore, Paul's basis in the land is limited to 70,000. His basis in the partnership interest is reduced by the basis he takes in the land, so \(70,000 - $70,000 = $0).

Question 7

Dale is a 25% partner in a general partnership. At the beginning of the year, Dale's basis was $40,000. The partnership's only liability is a $100,000 recourse loan. During the year, the partnership repays $40,000 of the loan principal. The partnership had $80,000 of ordinary income for the year.

What is Dale's adjusted basis at the end of the year?

  1. $50,000 (correct answer)
  2. $60,000
  3. $80,000
  4. $90,000
Explanation: 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=40,000 = 10,000). His share of the ordinary income is (25% * 80,000=80,000 = 20,000). His ending basis is: Beginning basis (40,000)+Shareofincome(40,000) + Share of income (20,000) - Deemed distribution from liability decrease (10,000) = \(50,000).

Question 8

On January 1, Year 1, Ethan contributed property to the EF Partnership for a 50% interest. The property had an adjusted basis of $30,000 and a fair market value of $50,000. Ethan's capital account was credited for $50,000. The partnership has no liabilities.

What is Ethan's initial tax basis and book capital account in his partnership interest?

  1. Tax basis of $30,000; Book capital account of $30,000
  2. Tax basis of $30,000; Book capital account of $50,000 (correct answer)
  3. Tax basis of $50,000; Book capital account of $30,000
  4. Tax basis of $50,000; Book capital account of $50,000
Explanation: A partner's initial tax basis in a partnership interest received for a property contribution is the adjusted basis of the property contributed. Therefore, Ethan's tax basis is $30,000. A partner's book capital account under Section 704(b) is generally credited with the fair market value of the property contributed. Therefore, Ethan's book capital account is $50,000. This creates a book-tax difference.

Question 9

The XYZ partnership has a general partner, Xavier, and a limited partner, Yasmine. Each has a 50% interest in profits and losses. The partnership has a $200,000 recourse liability and a $100,000 nonrecourse liability. Xavier's basis before considering liabilities is $50,000. Yasmine's basis before considering liabilities is $50,000.

What is Yasmine's adjusted basis in her partnership interest?

  1. $50,000
  2. $100,000 (correct answer)
  3. $200,000
  4. $300,000
Explanation: 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=100,000 = 50,000). Her total basis is (50,000+50,000 + 50,000 = $100,000).

Question 10

At the beginning of the year, Pat's basis in his partnership interest was $25,000. His share of partnership ordinary loss for the year was $35,000. His share of the increase in partnership liabilities for the year was $5,000.

What is the amount of loss from the partnership that Pat can deduct on his current year tax return?

  1. $5,000
  2. $25,000
  3. $30,000 (correct answer)
  4. $35,000
Explanation: 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)plushisshareoftheincreaseinliabilities(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.

Question 11

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?

  1. Amy's basis is $10,000; Partnership's basis is $10,000. (correct answer)
  2. Amy's basis is $10,000; Partnership's basis is $15,000.
  3. Amy's basis is $15,000; Partnership's basis is $10,000.
  4. Amy's basis is $15,000; Partnership's basis is $15,000.
Explanation: 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.

Question 12

Tom contributed equipment to a partnership for a one-third interest. The equipment had a fair market value of $90,000 and an adjusted basis to Tom of $40,000. The partnership also assumed a $30,000 loan on the equipment. The other two partners contributed cash.

What is Tom's initial basis in his partnership interest?

  1. $10,000
  2. $20,000 (correct answer)
  3. $40,000
  4. $60,000
Explanation: A partner's basis is their contributed property's adjusted basis (40,000),reducedbythetotaldebtassumedbythepartnership(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=30,000 = 10,000). So, his basis is (40,000−40,000 - 30,000 + 10,000=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=30,000 = 20,000), so (40,000−40,000 - 20,000 = $20,000).

Question 13

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?

  1. $50,000
  2. $70,000 (correct answer)
  3. $100,000
  4. $120,000
Explanation: 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=80,000 = 20,000). Therefore, the partner's initial outside basis is (50,000+50,000 + 20,000 = $70,000).

Question 14

Wendy is a 50% partner in the WR partnership. Her basis in the partnership interest at the beginning of the year was $80,000. During the year, the partnership had gross rental income of $100,000, operating expenses of $60,000, and paid a fine of $10,000 for a local ordinance violation. The partnership distributed $15,000 to Wendy.

What is Wendy's basis at the end of the year?

  1. $75,000
  2. $80,000 (correct answer)
  3. $85,000
  4. $90,000
Explanation: First, calculate partnership net income: (100,000−100,000 - 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)−Shareofnon−deductiblefine(20,000) - Share of non-deductible fine (5,000) - Cash distribution ($15,000) = ($80,000).

Question 15

Dan has a $60,000 basis in his partnership interest. The partnership distributes to Dan, in a non-liquidating distribution, two assets: $20,000 in cash and inventory with a basis to the partnership of $50,000.

What is Dan's basis in the inventory he receives?

  1. $20,000
  2. $40,000 (correct answer)
  3. $50,000
  4. $60,000
Explanation: In a non-liquidating distribution, basis is first reduced by any cash received. Dan's basis becomes (60,000−60,000 - 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.

Question 16

Cobb is a 25% partner in the CDE Partnership. At the beginning of the year, his outside basis was $30,000. During the year, the partnership had a $160,000 ordinary loss and a $20,000 increase in partnership recourse debt.

What is Cobb's adjusted basis in his partnership interest at year-end?

  1. $0 (correct answer)
  2. $5,000
  3. ($5,000)
  4. ($10,000)
Explanation: 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=20,000 = 5,000). His basis before considering the loss is (30,000+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.

Question 17

Rick's basis in his partnership interest is $40,000. He receives a non-liquidating cash distribution of $15,000 and a distribution of property with an adjusted basis to the partnership of $30,000.

What is Rick's basis in his partnership interest after the distributions?

  1. $0 (correct answer)
  2. ($5,000)
  3. $10,000
  4. $25,000
Explanation: When a partnership makes distributions, cash is considered first. Rick's basis is first reduced by the cash distribution: (40,000−40,000 - 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,Ricktakesa25,000). 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).

Question 18

Leo contributes land to the newly formed LMN Partnership in exchange for a 33% interest. At the time of contribution, the land has an adjusted basis of $50,000 and a fair market value of $80,000. The land is subject to a mortgage of $20,000, which the partnership assumes. What is Leo's initial basis in his partnership interest?

  1. $30,000
  2. $36,600 (correct answer)
  3. $50,000
  4. $60,000
Explanation: A partner's initial basis in a partnership interest is the adjusted basis of the property contributed, increased by the partner's share of partnership liabilities and decreased by any of the partner's individual liabilities assumed by the partnership. Leo's basis is calculated as follows: Adjusted basis of land contributed (50,000)minusthefullmortgageassumedbythepartnership(50,000) minus the full mortgage assumed by the partnership (20,000), plus Leo's 33% share of that mortgage now considered a partnership liability (33% * $20,000 = 6,600). The calculation is \(50,000 - $20,000 + $6,600 = $36,600).

Question 19

Frank is a 30% partner in FGH Partnership. His basis at the beginning of the year was $100,000. During the year, the partnership had the following items: Sales revenue of $500,000, Cost of Goods Sold of $300,000, guaranteed payment to Frank for services of $40,000, and charitable contributions of $10,000.

What is Frank's adjusted basis in his partnership interest at the end of the year, before any distributions?

  1. $135,000
  2. $145,000 (correct answer)
  3. $157,000
  4. $185,000
Explanation: 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′sbasisisincreasedbyhisdistributiveshareofpartnershipincome(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.

Question 20

Grace is a member of an LLC taxed as a partnership. Her tax basis in her interest at the beginning of the year was $10,000. During the year, her share of partnership activities was as follows: ordinary income of $5,000, long-term capital gain of $2,000, and a cash distribution of $20,000.

What is the tax consequence of the distribution to Grace?

  1. $0 gain and a remaining basis of $3,000.
  2. $3,000 capital gain and a basis of $0. (correct answer)
  3. $10,000 capital gain and a basis of $0.
  4. 20,000capitalgainandabasisof(20,000 capital gain and a basis of (10,000).
Explanation: A partner's basis is first increased by their share of income items before accounting for distributions. Grace's basis before the distribution is (10,000(beg.basis)+10,000 (beg. basis) + 5,000 (ord. income) + 2,000(LTCG)=2,000 (LTCG) = 17,000). A cash distribution reduces basis, but not below zero. Any cash distributed in excess of basis is treated as a capital gain. The distribution is $20,000. The first $17,000 reduces her basis to 0. The remaining \(20,000 - $17,000 = $3,000) is recognized as a capital gain.