Example of partnership liquidating distribution
Partnerships allow multiple people to pool their assets together and conduct business.
When it comes time to part ways, the partnership distributes its assets back to the partners and dissolves.
Basis increases with the partner’s share of income and contributions to the partnership.
That allows the partner to receive distributions up to his basis as a tax-free return of capital.
The partnership agreement determines the allocation of these items. If the partnership agreement is silent, these items are allocated in accordance with the partnership interests. If the partnership agreement allocates partnership items among the partners, the allocation is respected as long as one of the following is true: If an allocation does not meet one of these requirements, the allocation of income, gain, loss, deduction, or credit is reallocated in accordance with the partner’s interest in the partnership. Special rules apply to allocations of property with built-in gain and loss. Important Note: The rules governing substantial economic effect are complex and must be given special consideration if the partnership agreement or operating agreement provides for allocations other than in accordance with each partner’s interest in the partnership.
Basis in a partnership is a moving target, requiring frequent adjustments.
Sean Butner has been writing news articles, blog entries and feature pieces since 2005.
His articles have appeared on the cover of "The Richland Sandstorm" and "The Palimpsest Files." He is completing graduate coursework in accounting through Texas A&M University-Commerce.
As with S corporations, the tax consequences of a distribution to a partner are heavily dependent on the partner’s basis in his partnership interest.
A partner’s initial basis in his partnership interest depends on how the partner acquired the interest.