TimRiders LP: Partnership Operations & Basis Analysis 

Problem: TimpRiders LP Basis Calculation

Scenario: Amir (Limited Partner) and Francesca (Managing General Partner) have the following beginning tax bases:

• Amir: $11,200

• Francesca: $3,800

Current Year Data:

1. Ordinary Income: $30,000 (Allocated 50/50)

2. Short-term Capital Loss: ($14,000) (Allocated 50/50)

3. Cash Distributions: $3,800 to each partner.

Order matters: Basis always goes UP (income) before it goes DOWN (distributions/losses).

The floor is zero: a tax basis can never be a negative number.

The "ATM" Rule: Cash distributions are subtracted before you calculate if a loss is allowed.

The §704(d) Barrier: If a loss is bigger than the remaining basis, the extra amount is suspended (saved for next year).

Active vs. Passive:  * Limited Partners = Passive (harder to use losses).

• General Partners = Non-passive (easier to use losses).

The K-1 Calculation Steps

• Split Everything 50/50: Multiply all partnership totals (losses, gains, interest) by 0.50 for Amir’s share.

• Box 1 (Ordinary Loss): Report the $6,500 loss. This is the main "operating" result.

• Box 10 (Sec. 1231 Gain): Put the $3,400 gain here. It’s kept separate because it gets special tax rates.

• Box 18 (The "Ghost" Income): Enter the $1,400 tax-exempt interest. It’s not taxed, but it must increase his basis.

• Box 19 (Cash Out): Report the $3,800 distribution. This is just moving money from the partnership to his pocket.

• Item L (The Check): Start with $11,200, add income, subtract losses/distributions. If you hit $4,000, you win.

• Box 1: $6,500 Loss (50% of $13,000).

• Box 10: $3,400 Gain (50% of $6,800). Reported separately as it may be taxed at capital gains rates.

• Box 18: $1,400 Tax-Exempt Income. Crucial: Increases basis even though it isn't taxed!

• Item L (Capital Account): > * Beginning: $11,200

  • Net Income/Loss: ($4,800) [$3,400 gain - $6,500 loss - $1,700 net]

  • Other: $1,400

  • Distributions: ($3,800)

  • Ending Capital: $4,000

K-1 Allocation for General Partners 

Now, prepare the Schedule K-1 for Francesca, the managing general partner. Unlike Amir, Francesca is active in the business and has a different starting basis.

Data to Report (50% Share):

• Ordinary Business Loss: ($6,500)

• Section 1231 Gain: $3,400

• Tax-Exempt Interest: $1,400

• Cash Distributions: $3,800

Pay close attention to Item L. Francesca’s starting basis was only $3,800. How does the tax-basis limitation affect her final reporting?

Box 1 vs. Self-Employment: Because Francesca is a General Partner, her ordinary loss is also reported in Box 14 (Code A). This is a huge distinction from Amir’s limited partner K-1.

The Negative Capital Account (Item L): Notice that Francesca's ending capital is ($3,400).

The "Why": While her tax basis can't go below zero,B her book capital account can. This negative $3,400 represents the "Suspended Loss" we calculated earlier.

Material Participation: Since she is a managing partner, her losses are non-passive (ordinary), meaning she can use them to offset other types of income (subject to basis limits).