Partnership P ("P") has two individual partners (A and B). Each are 50% owners in P. At the beginning of Year 1, A's outside basis was $1,000 and B's outside basis was $10,000. During Year 1 P earned $2,000 of income from operations, $1,000 of tax exempt income, and paid off $10,000 of a recourse liability. What income, gain or loss, if any, will A report on A's individual income tax return (for Year 1) as a result of being a partner in P?

Question

Rachael Kirby

Business

6 June, 15:40

Partnership P ("P") has two individual partners (A and B). Each are 50% owners in P. At the beginning of Year 1, A's outside basis was $1,000 and B's outside basis was $10,000. During Year 1 P earned $2,000 of income from operations, $1,000 of tax exempt income, and paid off $10,000 of a recourse liability. What income, gain or loss, if any, will A report on A's individual income tax return (for Year 1) as a result of being a partner in P?

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Corey Chaney · Answer 1

P's income = $2,000 + $1,000 (tax exempt) = $3,000

The paying of the recourse liability will be considered a distribution to the partners, so the partners' basis will be affected.

Since both partners A and B each own 50%, then A should report $4,000 in gains from the distribution (payment of recourse liability - basis) plus $1,000 in ordinary income.

Since partnerships are pass through entities, they are not taxed directly, the partners are taxed.