Partnership Taxation: Basis – Lesson 1

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In this video, 4.02 – Partnership Taxation: Basis – Lesson 1, Roger Philipp, CPA, CGMA, explains that the most important concept in partnership tax law is that of a partner’s basis, which refers to the amount the partner has at risk in the partnership.

Roger provides a helpful schematic for calculating ending outside basis, starting from beginning outside basis or initial contribution and analyzing the basis for the effects of partnership income or loss, contributions to the partnership, distributions from the partnership, the partner’s share of partnership liabilities, and liabilities contributed by the partner to the partnership.

For instance, if a 10% partner contributes property subject to a $100 mortgage to a partnership, the partner’s basis decreases by the $100 contributed liability but increases by $10 to reflect the partner’s share in the liability now assumed by the partnership. It is important to understand that a partner’s basis is not identical with the partner’s equity or capital in the partnership. The main or sometimes only difference between a partner’s basis and the partner’s capital account is the partner’s percentage share of the partnership’s liabilities. Another tricky factor is that a partner’s basis will decrease when the partnership pays off a liability.

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Video Transcript Sneak Peek:

Okay let’s look at in your notes operation of the partnership. And the operation of the partnership, you’ll see we kind of talked about this with an S Corp, but it’s a little bit different here in a partnership, why? Because earlier we said what? It’s created informally. Why? You have unlimited liability. What does that mean? It means everything you own is at risk. Woooh.

So let’s come back over here to the flow, the operation of in this case the partnership. You got your initial contribution. Uh huh. Plus or minus your percent of income, same as in S Corp. Percent of loss, separately stated items, municipal bond interest minus your distribution or your distribution received. Then equals your net outside basis.

Now here’s what’s changing. What’s changing is these two things that I had added earlier and said we’ll talk about those later when we talk about a partnership. Guess what? Now is later. Now and later. Remember the candy Now and Later? Alright, so this is going to be plus my percent of partnership liabilities. Hmm? I’ll come back to that.

This one is minus your contributed. Let me get rid of that part. Contributed liability. And that’s a minus. So minus contributed liability equals your outside basis. So we’re adding these two things here. These two are the new things that relate to a partnership, not to an S Corp. Why? All because in a partnership everything you have is at risk.

So what it says here is all the stuff we kind of understood plus my percent of partnership liabilities. What this says is as the partnership has more liabilities, I am more at risk. My basis goes up. So the more liabilities, the more debt, the more basis. Minus contributed liability. That means if I bought in with an asset and the partnership assumed the liability.

Let’s say I contributed property, but it was subject to a mortgage. Then it would be minus the contributed liability. So I would pick up my percent of the mortgage minus the liability that I just got rid of. So that’s what we’re looking at as far as those two categories, those two terms. And that’s why it is so important. So it’s important to understand that.

We also have to distinguish between a couple of words called your basis, and your capital or equity accounts. Alright let’s look in notes at basis. It says the most important concept in partnership tax law is that of a partner’s basis which refers to the amount the partner has at risk in the partnership. So how much do we have at risk? A partner’s basis is not identical with the partner’s equity or capital in the business. So since the amount a partner has at risk or basis includes each partner’s share of the partner’s liabilities to the creditors.

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