Keeping Track of Partner Basis: Why Is It Important?
2019 – 11/26 Keeping track of “basis” in partnership interest is important. Because of the pass-through nature of partnerships (i.e., only the partners are taxed on partnership operations), a method is needed to account for (1) costs in acquiring the partnership interest, (2) annual contributions and distributions, and (3) how partnership profits and losses are allocated. This method generates a basis amount each year, which represents the after-tax investment in the partnership.
The first step in tracking basis is establishing an initial basis amount.
- When a partner purchases a partnership interest from another partner, the purchase price becomes the initial basis number.
- 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 basis has been established, that basis is adjusted to reflect subsequent partnership operations and other events.
- 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.
Maintaining basis is important because it determines how much you may withdraw or deduct from the partnership without recognizing additional gain or without being limited on the allowable pass-through of partnership losses. It’s the owners responsibility, not that of the partnership, to keep track of basis. If you need assistance in determining or keeping track of basis, or if you would like to discuss further, please contact us.