Partnership Basis

November 2, 2020

Basis is used in partnership accounting to refer to: 

  • The value (cost) of a partner’s assets prior to contributing them to the partnership;
  • The partner’s value of ownership in the partnership after contributing assets; and
  • The partnership’s value of the contributed assets.
Office Land Partnership

An example will illustrate these different applications of basis:

On January 1 of the current year, John contributed the following for a 1/3 interest in the WMC partnership: land with a resale value of $120,000; 20 shares of stock with a fair value of $50 per share; and $14,000 cash. John had bought the land 10 years earlier for $90,000 and still owes $15,000 on it, and he bought the shares 18 months ago for $45 each. The company will assume the debt on the contributed land. WMC had taxable earnings of $105,000 and paid cash distributions of $3,000 to each of its partners at year-end. 

This example can produce several questions, such as:

(1) What was John’s basis in his properties before contributing them to the partnership? 

A property’s basis is its cost, including associated fees, taxes and assessments.

  • Land: $90,000 (purchase price) – $15,000 (remaining debt) = $75,000. 
  • Stock: 20 shares x $45 per share = $900.
  • Cash: $14,000.

John’s basis in his property before contribution = $75,000 + $900 + $14,000 = $89,900.

(2) What was John’s basis in his partnership interest at January 1?

$89,900 (John’s basis in property contributed) + $5,000 (John’s share of liability from the land $15,000 ÷ 3). Since the partnership owns the land, the debt is shared by all partners.

John’s initial basis (“outside basis”) in partnership interest = $89,900 + $5,000 = $94,900.

REG Example Questions

(3) What was the partnership’s basis in the property that John contributed?

The partnership’s basis (“inside basis”) is the fair market value of the properties.          

($120,000 – $15,000) + $1,000 + $14,000 = $130,000.

(4) What were the company’s total assets worth after John’s contributions? 

Since John’s assets purchased a 1/3 share of the partnership, the total worth of the company must be 3 times what John contributed (at fair market value). $130,000 x 3 = $390,000.

(5) What total income did John receive from the partnership in the current year? 

$35,000 earnings ($105,000 x 1/3) + $3,000 distribution = $38,000.

(6) What was John’s basis in his partnership interest at the end of the current year? 

Earnings are reported as taxable income, but distributions are considered to be a return of his invested capital and, therefore, reduce his basis.

Note: The difference between John’s basis in his partnership interest and the partnership’s basis in his contributed assets is a deferred gain that John will recognize if he sells his interest in the partnership.

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