Is your statement "passed through income increases your basis in the partnership [and] losses decrease your basis" correct? I think it decreases basis, not increases it.

Forum|Forum|7 years ago
June 6, 2019
1 reply
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In answer to the question "Where can I file the partnership cash distributions from MLPs", you (ttlc.intuit.com/questions) stated that " . . . passed through income increases your basis in the partnership while losses decrease your basis." I thought that passed-through income decreases basis, not increases it. Is your answer incorrect?

Best answer by DanielV01

It is correct. An illustration might help. Before you set up your partnership, say you and X each invest 10,000. Your basis in the partnership is now 10,000. In year one, the partnership earns 30,000, and you split that 50/50. Your basis has grown to 25,000 each, provided you keep the earnings in the Partnership. Distributing the earnings consequently lowers the basis again.

So now let's say each of you, because of other income you receive, decided to keep those earnings in the partnership (you pay the tax of the earnings on the personal return); and now in year two, the business had a bad year and suffers a $10,000 loss. Each of you will reduce your basis $5000 (lost money) and claim a 5,000 loss on your personal returns.

Because things were so bad, you each needed a bit of money and each took 10,000 out of the business. That money is now not taxed, and you each have 10,000 of basis still left in the business.

DanielV01Answer

Level 15

Because things were so bad, you each needed a bit of money and each took 10,000 out of the business. That money is now not taxed, and you each have 10,000 of basis still left in the business.

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giorgition68Author

Level 2

Your answer was helpful, and correct as far as I can tell. I misunderstood the original ttlc.intuit.com statement which prompted my original query. So although PASSED-THROUGH INCOME increases one's basis in a partnership, CASH DISTRIBUTIONS from a partnership (which essentially are returns of capital) reduce one's basis. Is that correct?