Describe and contrast inside and outside basis as relates to partners and partnerships

Describe and contrast inside and outside basis as relates to partners and partnerships

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Describe and contrast inside and outside basis as relates to partners and partnerships. Be thorough with your answer and give an example. It is very important to understand the meaning of “outside basis” and “inside basis” to grasp the mechanics of partnership accounting. Outside basis is about a partner’s basis in their partnership interest. It is used mainly to compute gain or loss from partnership distributions, the sale of a partnership interest, and the deductibility of partnership losses to the partner. The outside basis equals the sum of the following: a) The adjusted basis of any property contributed by an incoming partner to the partnership b) Any ordinary income recognized by incoming partners who contribute services in exchange for a partnership interest c) The incoming partners’ share of partnership liabilities. After the partner’s initial outside basis has been determined, this amount is adjusted upward or downward to reflect subsequent operating results or structural events.
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Unformatted text preview: For example John contributes $10,000 cash to X partnership in exchange for 25% interest in the partnership capital and profit and losses. X partnership had $2,000 liabilities of which Johns 25% share is $ 500. So Johns outside basis in the partnership interest would be 10,000+500= $ 10,500 Inside basis refers to the adjusted basis of the assets of the partnership. An inequality between inside basis and total outside basis results from certain transactions. The partnership is permitted to adjust the inside basis of its assets, thereby preserving equality between inside basis and outside basis. This adjustment to basis is accomplished by filing a Code Sec. 754 election For example is a partnership owns a warehouse with an adjusted basis of $100,000. And John buys 50% of the interest for a certain amount. Her inside basis of the share of the warehouse would be 50%*100,000 = $50,000....
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