When completing Form 1065, US Return of Partnership Income, each partner is required to be given a Schedule K-1 (Form 1065). However, the partnership isn't responsible for keeping the information needed to figure the partner's basis in the partnership. Although the partnership does provide an analysis of the changes to the partner's capital account in item L of Schedule K-1, that information is based on the partnership's books and records and cannot alone be used to figure the taxpayer/partner's basis.
A taxpayer's basis in a partnership consists of the net cash that the partner has contributed to the partnership entity plus the adjusted basis of any property that the partner has also contributed to the entity. Generally, a taxpayer may not claim their share of a partnership loss (including a capital loss) to the extent that it is greater than the adjusted basis of their partnership interest at the end of the partnership's tax year. However, any losses and/or deductions not allowed because of the basis limit can be carried forward indefinitely and deducted in a later year subject to the taxpayer's basis limit for that year. For these reasons, the taxpayer must keep track of their basis in the partnership to accurately account for deducting losses and calculating any gain (or loss) at the time of disposition of the partnership interest.
Increases to the partner's basis
- The partner's additional contributions to the partnership, including an increased share of, or assumption of, partnership liabilities.
- The partner's distributive share of taxable and nontaxable partnership income.
- The partner's distributive share of the excess of the deductions for depletion over the basis of the depletable property, unless the property is oil or gas wells whose basis has been allocated to partners.
Decreases to the partner's basis
The partner's basis is decreased (but never below zero) by the following items:
- The money (including a decreased share of partnership liabilities or an assumption of the partner's individual liabilities by the partnership) and adjusted basis of property distributed to the partner by the partnership.
- The partner's distributive share of the partnership losses (including capital losses).
- The partner's distributive share of nondeductible partnership expenses that are not capital expenditures. This includes the partner's share of any section 179 expenses, even if the partner cannot deduct the entire amount on his or her individual income tax return.
- The partner's deduction for depletion for any partnership oil and gas wells, up to the proportionate share of the adjusted basis of the wells allocated to the partner.
Partner's Adjusted Basis Worksheet
To assist the partners in determining their basis in the partnership, the IRS partner's instructions for Schedule K-1 includes a worksheet for adjusting the basis of a partner's interest in the partnership. See here.
A version of this worksheet can be generated in the partnership return in TaxSlayer Pro by selecting:
- Schedule K - Distributive Share Items
- Schedule K-1 Input - Select the partner.
- Partner's Adjusted Basis Worksheet - Enter any increases or decreases as needed.
Note: This is a guide on completing the Adjusted Basis Worksheet in a partnership return in the TaxSlayer Pro program. This is not intended as tax advice.