Okay let's look at in your notes operation of the partnership.
And the operation of the partnership, you'll see we kind of talked about this with an S
Corp, but it's a little bit different here in a partnership, why?
Because earlier we said what?
It's created informally.
Why?
You have unlimited liability.
What does that mean?
It means everything you own is at risk.
Woooh.
So let's come back over here to the flow, the operation of in this case the partnership.
You got your initial contribution.
Uh huh.
Plus or minus your percent of income, same as in S Corp.
Percent of loss, separately stated items, municipal bond interest minus your distribution
or your distribution received.
Then equals your net outside basis.
Now here's what's changing.
What's changing is these two things that I had added earlier and said we'll talk about
those later when we talk about a partnership.
Guess what?
Now is later.
Now and later.
Remember the candy Now and Later?
Alright, so this is going to be plus my percent of partnership liabilities.
Hmm?
I'll come back to that.
This one is minus your contributed.
Let me get rid of that part.
Contributed liability.
And that's a minus.
So minus contributed liability equals your outside basis.
So we're adding these two things here.
These two are the new things that relate to a partnership, not to an S Corp.
Why?
All because in a partnership everything you have is at risk.
So what it says here is all the stuff we kind of understood plus my percent of partnership
liabilities.
What this says is as the partnership has more liabilities, I am more at risk.
My basis goes up.
So the more liabilities, the more debt, the more basis.
Minus contributed liability.
That means if I bought in with an asset and the partnership assumed the liability.
Let's say I contributed property, but it was subject to a mortgage.
Then it would be minus the contributed liability.
So I would pick up my percent of the mortgage minus the liability that I just got rid of.
So that's what we're looking at as far as those two categories, those two terms.
And that's why it is so important.
So it's important to understand that.
We also have to distinguish between a couple of words called your basis, and your capital
or equity accounts.
Alright let's look in notes at basis.
It says the most important concept in partnership tax law is that of a partner's basis which
refers to the amount the partner has at risk in the partnership.
So how much do we have at risk?
A partner's basis is not identical with the partner's equity or capital in the business.
So since the amount a partner has at risk or basis includes each partner's share of
the partner's liabilities to the creditors.
Now if you look down on the next page, the page after, you'll see the words capital or
equity accounts.
What is that?
Like you ever heard of A cap, B cap, C cap?
We learned that in financial accounting in the FAR exam.
We talk about partnership, that kind of stuff.
So capital accounts represents the partner's share of partnership equity, which is partnership
assets minus liabilities.
A separate capital account for each partner is maintained.
A cap, B cap.
The partnership keeps track of each partner's capital account, and present an analysis of
the capital account on the schedule K1.
So on the K1 right here, we're going to keep track of the partner's capital account right
here.
It says, beginning, capital contributed.
Current year increase or decrease, withdrawals and ending capital.
So that is considered their capital.
But it doesn't include their percent of the liabilities, which affects the basis.
Let's read on.
Note the capital account is different than the partner's basis.
For example, the capital account does not include the partner's share of partnership
liabilities, whereas basis does.
So what does basis include?
It includes this, and I'll give you the example in a minute.
Basis includes your percent of the liabilities.
That affects your basis.
Your capital account does not.
We don't increase your capital because the partnership is in debt for more money.
Okay let's turn back to basics again.
It says, a partner's basis increases.
What would make the basis go up?
Contributions of assets.
We put assets in, it goes up.
Borrowing another debt.
Huh?
You're at risk for more, it goes up.
Allocation of partnership income.
We make money, it goes up.
What would cause a decrease?
Distribution of assets, goes down.
Allocation of partnership losses.
My share of the loss goes down.
Repayments of other debts.
So when we borrow money, the basis goes up.
When you pay it off, you're at risk for less.
Your basis goes down.
I know that seems kind of wacky, but that's how it works.
Again that's how it works.
That's how it's all interrelated.