Does my share of partnership debt let me deduct K-1 losses?

April 11th, 2013 by Joe Kristan

As we discussed yesterday, you need basis in your partnership or S corporation interest to deduct losses on your K-1.  There are other hurdles, but if you don’t have basis, you’re done.  Your basis generally starts with your investment in your interest; it’s increased by income items reported on your K-1, and by additional investments, and it’s decreased by your share of losses, expenses and distributions.

With partnerships, there is an extra wrinkle: your basis also includes your share of debts owed by the partnership.  That’s not true for S corporations.  But how do you know what your share of partnership debt is?

A properly-prepared partnership return will report each partners share of debt on part K of Schedule K-1:

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You can add the amounts on these lines to the amount of basis you have otherwise to determine your basis in your partnership interest.  The ability to use this “inside” partnership debt as basis is a reason why partners run out of basis less often than S corporation owners do.

Why do partners get basis in partnership borrowing while S corporation don’t get basis in corporate borrowing?  Because partnership tax in many ways treats the partnership as a combination of its members, rather than a separate entity.  If you buy a $100,000 house with $20,000 in cash and $80,000 in borrowed money, your basis in the house if you sell it is still $100,000.  Getting basis for partnership borrowings is a logical extension of this idea if you just have two people borrowing together.

You may have noticed the “Partner’s capital account analysis” on part L of the K-1, just below the debt thing:

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Can you use this as a shortcut to figuring your basis?  Usually not. Sometimes you can if the “Tax basis” box is checked, but even that is unreliable.  It’s much safer to track your own basis year-by-year based on your original and subsequent investments, distributions and K-1 items.

So you have basis?  Congratulations, but you still might not be able to deduct your losses.  Your basis still has to be “at-risk,” and your losses might be non-deductible if they are “passive.”

On the edge of your seat?  Check back tomorrow for another 2013 filing season tip!

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