We would like to make you aware of the importance of keeping track of the basis in your partnership interest. The fundamental purpose of outside basis is to account for a partner’s cost basis in his or her partnership interest. In other words, a partner’s outside basis represents his or her after-tax investment in the partnership. Outside basis determines how much a partner may withdraw or deduct from a partnership for tax purposes without recognizing additional gain or without being limited on the allowable flow-through of partnership losses.
Because of the flow-through, single-level taxation of partnerships where partners (not the partnership) are taxed on partnership-level transactions, a method is needed to account for each individual partner’s (a) contributions and distributions, (b) allocations of profits and losses, and (c) acquisition cost for the partnership interest (other than by contribution).
Basis is adjusted partner by partner for actual financial transactions. For partners acquiring a partnership interest other than by contributions, the direct calculation of basis does not begin with a zero basis. When a partner purchases a partnership interest from another partner, the transferee partner’s purchase price becomes the initial outside basis. When a partnership interest is acquired by gift, the transferee partner’s basis generally equals the donor’s basis. The basis of an inherited partnership interest equals the fair market value of the partnership interest at the decedent’s date of death or the alternative valuation date, if applicable.
After a partner’s initial outside basis has been established, that basis is adjusted to reflect subsequent partnership operations and other events. Outside basis is increased by additional contributions of money, property, services, and the partner’s share of liabilities and partnership income.
Basis is decreased (but not below zero) by the amount of money and the basis of property distributed to the partner, as well as by the partner’s share of partnership losses and nondeductible partnership expenses.
It is the partner’s responsibility, not that of the partnership, to keep tracks of your outside basis. As you can see, it is adjusted frequently throughout the year. Please give us a call if you have questions or want more information.