A Denver business attorney at The McGuire Law Firm can assist business owners in understanding their ownership interest in their business and how such value can impact their tax consequences upon sale or transfer. The article below has been drafted by a business attorney to discuss a partner’s basis in their partnership interest.
Just as your basis in a share of stock is important for determining gain or loss upon the sale of that stock, a partner’s basis in their partnership interest is important in determining gain or loss after sales, exchanges or distributions, and also when computing certain basis adjustments.
A partner’s basis in a partnership interest acquired by contribution is the sum of the money contributed and the adjusted basis of any property contributed. However, if gain is recognized, the partner does not receive an income in basis for the amount of the gain recognized under Internal Revenue Code Section 731. The contribution of promissory note by a partner does not increase the partner’s basis because Under IRC Section 722, the partner has a basis of zero in the note. When losses or deductions are passed through from the partnership to the individual partners, a partner’s distributive share of the partnership loss or deduction is deductible only to the extent of their basis at the end of the taxable year under IRC 704(d). If a partner has disallowed losses, these losses are carried forward until the partner has sufficient basis to take the loss, which is stated under Regulation 1.704-1(d).
A partner’s basis within the partnership is adjusted as the partnership operates and income & losses are distributed to the partner. A partner’s basis will increase under IRS Section 705 by the sum of the distributive share for the taxable year and prior taxable years regarding the following items: taxable income to the partnership; income of the partnership exempt from tax; the excess of the deduction for depletion over the basis of the property subject to depletion; and, additional capital contributions. A partner’s basis will decrease under IRC Section 705(a)(2) (but not below zero) by distributions from the partnership (property or monies) and by the sum of the partner’s distributive share for the taxable year and prior taxable years for losses of the partnership and expenditures of the partnership not deductible in computing taxable income & not properly chargeable to capital (meals & entertainment).
When individuals are considering forming a partnership and contributing money and/or property, it is advised that the partners or the partnership consult a tax attorney or business attorney regarding the importance of basis and adjustments to basis. Because a partner’s basis “follows” the partner it is important to correctly and accurately track each partner’s basis, and for the partner’s to understand how certain transactions can impact their basis.
A Denver business attorney and tax attorney at The McGuire Law Firm can assist clients regarding partnership transactions and partnership issues including: formation, contribution of property, partnership taxation, allocation of partnership items, purchase or sale of partnership interests and other transactional matters.
Schedule a free consultation with a business attorney by contacting The McGuire Law Firm!