An Interactive Guide to Advanced Partnership Taxation
This guide breaks down complex U.S. partnership tax rules into simple, interactive examples. Explore key concepts from formation to distributions to better understand the flow-through entity lifecycle.
Formation & Contributions
When a partnership is formed, partners contribute assets or services. Generally, contributing property for a partnership interest is a tax-free event. However, the nature of the contribution (property vs. services) and the interest received (capital vs. profits) can create a taxable event. Use the interactive tool below to see how these scenarios differ.
Tax Outcome:
Understanding a Partner's Basis
A partner's basis in their partnership interest ("outside basis") is a critical calculation that determines the tax consequences of distributions and the amount of losses they can deduct. It starts with the initial contribution and is adjusted for the partnership's debt. Explore how basis is calculated and how different types of debt affect it below.
Calculator: Initial Outside Basis
Calculate a partner's initial basis when they contribute property with an associated liability. This is based on Example 5 from the text.
Visualization: Debt's Impact on Basis
A key benefit of partnerships is that partners can include their share of partnership debt in their basis. However, not all debt is treated equally for the "at-risk" basis limitation. Select a partner type to see the difference.
Loss Limitations
A partner's ability to deduct partnership losses on their personal return is not unlimited. The loss must pass through four sequential hurdles. A failure at any step suspends the loss. Explore these limitations with the diagram and calculator below.
The Four Hurdles for Deducting Losses
1. Tax Basis
Can't deduct loss > basis.
2. At-Risk Basis
Generally excludes non-QNF nonrecourse debt.
3. Passive Activity Loss (PAL)
Limits on non-active investors.
4. Excess Business Loss
Overall limit on business losses.
Calculator: Loss Deductibility
Based on Example 8, see how the Tax Basis and At-Risk rules limit the deductible loss for an LLC member.
Nonliquidating Distributions
Distributions of cash or property to a partner are generally a tax-free return of their investment, but they reduce the partner's outside basis. A key rule is that a property distribution cannot reduce a partner's basis below zero. If the property's basis exceeds the partner's remaining basis, the partner must take a lower basis in the property. This calculator demonstrates that principle.
Calculator: Distribution Basis Impact
Based on Example 10, see how a distribution of cash and property affects the partner's basis and the basis of the property they receive.