A partnership is a good way to pool money and resources among several individuals to run a business. Partnerships do not pay taxes; the partners pay taxes based on distributed gains in excess of the basis each partner has. Calculating the basis is essential in determining if a partner has a taxable event or not. While the partnership does not pay taxes, it reports to the IRS basis information as calculated in a Schedule K-1.
Calculate the total amount invested in the partnership with cash and property value. Call this "original basis." For example, if you placed $2,000, $1,000 and $2,000 into the partnership over a three-year period, your original basis is $5,000.
Calculate distributions. If the partnership dispersed $1,500 over this year and last year to you, your total distributed amount is $3,000.
Subtract the distributions from your original basis. This number is your current partnership basis. In this example: $5,000 - $3,000 = $2,000.
You can never have a negative basis. Once distributions offset 100% of your basis, you start paying tax on the distributions.
Basis calculation is important when new partners join the company or an old ones leaves, as it helps determine the new ownership percentages of each partner. Basis may also be a factor in resolving disagreements among partners.
A Schedule K-1 for the company may not always properly account and allocate basis since there may be outside and inside basis involved. Inside basis is your contributions into the partnership. Outside basis may include liabilities that increase based on your work within the partnership. A tax advisor will be able to properly calculate your outside basis.
Things You'll Need
Partnership Schedule K-1