@RedCab "whatever is retained is pro-rated to the investors as income and taxed" <-- This.
Imagine the partnership makes $5000, reporting it on the K-1. You'd report the $5000, pay taxes on it, AND increase your basis from $25k to $30k. Basically, any non-cash K-1 items that increase your taxes also increase your basis. Any non-cash K-1 items that lower your taxes, lower your basis. As for cash distributions, if you pay taxes on the distribution, it doesn't affect basis. If you don't (e.g., some partnership distributions are treated as return of capital), they lower your basis.
In the end, the total loss you report to the IRS has to match the actual loss you experienced. And similarly, any gain they tax should match an actual profit.
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**Note also, I'm not a Tax Preparer/CPA. Just a volunteer, seasoned, TurboTax user.
Use any advice accordingly!
