Outside Basis: Determining, Documenting, and Reconstructing for Partners, Members, and Shareholders

Determining outside basis is one of the most complex yet critical components of flow-through entity taxation. The recent addition of tax basis capital reporting requirements emphasizes the fact that extensive audits of flow-through entities by the IRS will continue. These examinations concentrate on distributions and losses in excess of basis.

Outside basis is a partner's interest in a partnership, while inside basis is the partnership's investment in a partnership. Additional contributions, assumption of liabilities, and taxable and nontaxable income can increase a partner's basis. In contrast, distributions, a reduction in liabilities, and partnership losses and nondeductibles will decrease a partner's basis. Documenting these transactions from the initial entry into a partnership until the partners' exit is critical. This information is necessary to calculate distributions in excess of basis and the deductibility of losses.

All partners and shareholders should update and retain outside basis schedules. However, prior miscalculations, loss of documentation, or the acquisition of a new client can all create the need to reconstruct prior outside basis for a partner or member. Understanding how to best recapture this information using prior returns and client data is key.

Listen as our panel of dispute resolution experts explains the importance of determining, documenting, and reconstructing outside basis if needed to properly determine amounts available for loss deductions and to calculate gains and losses upon the disposition of an interest in a flow-through entity.