When completing the Form 1065 – US Return of Partnership Income, each partner is required to be given a Schedule K-1 (Form 1065). See: Instructions for Form 1065 – US Return of Partnership Income. However, the partnership isn’t responsible for keeping the information needed to figure the basis of the taxpayer’s partnership interest. 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’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, keeping track of the basis that the taxpayer has in the partnership interest is necessary to accurately account for deducting losses and calculating any gain (or loss) at the time of disposition of the partnership interest.
The partner’s basis in the partnership can be increased or decreased by certain items:
Increases. The partner’s basis is increased by the following items:
- 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. 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.
To assist the partners in determining their basis in the partnership, a worksheet for adjusting the basis of a partner’s interest in the partnership is found in the Partner’s Instructions for Schedule K-1 (Form 1065). A version of this worksheet can be generated in Keystone Tax Solutions Pro and is accessed in the Business Program from the Main Menu of a Partnership Tax Return (Form 1065) by selecting:
- Schedule K – Distributive Share Items
- Schedule K-1 Input – Select the Partner to be edited
- Partner’s Adjusted Basis Worksheet
At the Adjusted Basis Worksheet menu, the user will be able to enter, based on the accounting records of the partnership, any of the above referenced items that will either increase or decrease the partner’s basis.
NOTE: This is a guide on entering the Adjusted Basis Worksheet (Form 1065) into the Keystone Tax Solutions Pro program. This is not intended as tax advice.