Basis Calculation - John R. Dundon II, Enrolled Agent
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Basis Calculation

Basis Calculation

Under §165, in general, the basis of a partnership interest equals the sum of the amount of money contributed, the partner’s share of partnership liabilities and the partner’s distributive share of partnership income and losses. How to compute the adjusted basis of the partnership interest when there is an initial contribution to the partnership, followed by a large distributed loss that exceeds the partner’s original basis can become complicated.

Section 705(a) requires that the adjusted basis be determined by increasing the original basis by the sum of the partner’s distributive share of partnership income for the current and prior taxable years and decreasing it by the sum of the partner’s distributive share of losses for the current and prior taxable years.

It appears that if a partnership incurs and distributes
a significant loss in one taxable year, that loss is carried along in ultimately calculating what the adjusted basis of a partnership interest would be in a later year. The adjusted basis at any particular point cannot go below zero. However, this does not mean that the sum of the distributive shares of income and losses over the history of the partnership is permanently set to zero at any point that the sum becomes negative. The nondeductible portion of the loss is suspended and deducted in a subsequent year in which there is additional basis. The loss is not gone forever.

The calculation of basis will occur only when needed, and that
calculation will reflect all preceding distributed income and losses. The adjusted basis need not be calculated annually. In addition, the adjusted basis for one year does not begin with the basis set for the immediately preceding year, with any negative result for that prior period being set to zero.