CPA Exam — REG (Regulation)Federal Taxation of EntitiesMedium
A client, Partnership P, has two 50% partners, A and B. For the current year, P's ordinary business income is $100,000, and it has a separately stated long-term capital gain of $20,000. Partner A's basis before any distributions or income allocations was $70,000. What is Partner A's adjusted basis at year-end?
- A$120,000
- B$130,000
- C$70,000
- D$140,000
Show answer & explanationAnswer & explanation
Correct answer: B. $130,000
Partner A's basis increases by their share of ordinary business income and separately stated income items. Partner A's share of ordinary business income is $100,000 * 50% = $50,000. Partner A's share of long-term capital gain is $20,000 * 50% = $10,000. Therefore, Partner A's adjusted basis is $70,000 (initial basis) + $50,000 (ordinary income) + $10,000 (capital gain) = $130,000.
Why the other options are wrong
- A. This incorrectly includes only ordinary income, or miscalculates the shares.
- C. This is the initial basis, not the adjusted basis after income allocation.
- D. This would be the basis if the partner received all income, or if there was a calculation error.
Partnership Basis Adjustments
A partner's basis in their partnership interest is adjusted annually to reflect their share of partnership income, losses, contributions, and distributions.
- Basis increases by contributions and share of income/gains.
- Basis decreases by distributions and share of losses/expenses.
- Basis cannot go below zero.
Memory trick: Contributions Add, Distributions Subtract, Income Increases, Losses Decrease.