Alfred, a one-third profits and capital partner in Pizzeria Partnership, needs help in adjusting his tax basis to reflect the information contained in his most recent Schedule K-1 from the partnership. Unfortunately, the Schedule K-1 he recently received was for Year 3 of the partnership, but Alfred only knows that his tax basis at the beginning of Year 2 of the partnership was $23,000. Thankfully, Alfred still has his Schedule K-1 from the partnership for Years 1 and 2.Using the following information from Alfred's Year 1, Year 2, and Year 3 Schedule K-1, calculate his tax basis the end of Year 2 and Year 3. Year 1:Ordinary business income$10,000 Cash distribution$7,000 Alfred's share of partnership debt$85,000 Guaranteed payment$(4,500)Nondeductible expense$(1,000)Tax-exempt

Question

income$1,200 Year 2:Ordinary business loss$(5,000)Cash contribution$10,000 Alfred's share of partnership debt$73,000 Guaranteed payment$(7,500)Nondeductible expense$(3,000)Tax-exempt income$1,500 Year 3:Ordinary business loss$(13,000)Alfred's share of partnership debt$58,000 Nondeductible expenses$(3,000)Guaranteed payment$(7,500)

What will be an ideal response?

Answer 1

At the end of Year 2, Alfred's basis is $14,500, as shown in the calculations below:

Tax basis at the beginning of Year 2 + Cash contributions + Tax-exempt income ? Relief of debt ? Nondeductible expenses ? Ordinary business loss = New adjusted basis.
$23,000 + $10,000 + $1,500 ? $12,000 ? $3,000 ? $5,000 = $14,500.

At the end of Year 3, Alfred's basis is zero. As shown below, Alfred's deemed distribution from debt relief exceeds his tax basis prior to the distribution by $500; thus, he will recognize a $500 capital gain, leaving his tax basis at zero. His share of ordinary business loss and nondeductible expenses is carried forward and will reduce his basis in the future when his basis has increased.

Tax basis at the beginning of Year 3 ? Relief of debt + Capital gain recognized = New adjusted basis.

$14,500 ? $15,000 = ($500) + $500 capital gain = $0.