Partner basis
Outside basis from a K-1: build the rollforward before you believe the loss
Whether a loss is deductible this year is decided by the partner's basis, not by the partnership. The K-1 supplies the moving parts; the running total is the partner's, and it has one hard rule — it never ends below zero.
A K-1 with a large loss and a client who wants to deduct all of it is a conversation about basis. Not about the loss. The partnership reported the loss correctly. The question is whether the partner had enough invested to absorb it, and that answer lives on a schedule the client may never have asked for.
The lines
What moves basis, and what quietly gets left out
| Line | Comes from | Where the line gets dropped |
|---|---|---|
| Beginning outside basis | Last year's ending figure, which came from last year's K-1s and last year's return | An opening figure borrowed from the capital account instead of from the basis schedule. They are not the same number and they diverge a little more every year. |
| Share of income and gain | The K-1 boxes that increase basis, including tax-exempt income reported separately | Tax-exempt income left out because it produces no tax. It still raises basis, and omitting it understates how much loss the partner can take. |
| Contributions | Cash and property the partner put in during the year | A contribution recorded only in the partnership's books and never reflected on the partner's schedule. |
| Increase in share of liabilities | The movement, not the balance | The ending balance copied where the change belongs, which double-counts every year the partnership carries debt. |
| Share of losses and deductions | The K-1 boxes that decrease basis | Nondeductible expenses and the section 179 amount, which are easy to treat as capital-account-only items. |
| Distributions | Box 19, including the deemed distribution from a liability decrease | The deemed distribution under code D, which moves no cash and is therefore forgotten. |
| Decrease in share of liabilities | The movement, not the balance | Same failure as the increase line, in the other direction. |
The arithmetic, and the one line that decides everything
Add the increases, subtract the decreases, and look at the result before you look at the return.
Opening basis
+ income and gain items, including tax-exempt income
+ contributions, and any increase in the share of liabilities
− losses and deductions, including nondeductible items
− distributions, including deemed distributions
− any decrease in the share of liabilities
= Closing basis. If it is negative, the last decrease is not allowed in full.
A negative result is not a number to type into software. It is a statement that a loss or a distribution exceeded what the partner had in the entity, and the treatment differs: a loss is suspended and carried forward, while a distribution beyond basis becomes gain. Both outcomes change the return, and neither is visible unless someone runs this arithmetic.
Working backwards to prove the return is right
There is a second use for the rollforward, and it is faster than building one from scratch: take the losses the return actually claims and see what closing basis that implies. If the implied closing basis matches your computed figure, the limitation was applied correctly somewhere — perhaps by software you have not inspected. If it is higher than your figure, a loss went in that basis cannot support. If it is lower, a loss was suspended that did not need to be, and the client overpaid.
This works because the rollforward is over-determined: it can be approached from either end. The K-1 supplies the components, the return claims an outcome, and the two must describe the same closing balance. Where they do not, the gap is the amount to investigate — not the whole schedule.
Order of limits, in one paragraph
Basis is the first gate, and it is the only one the K-1 helps with. A loss that clears basis then meets the at-risk rules, and a loss that clears at-risk then meets the passive activity rules. A different slice can be held back at each stage, and every slice is tracked on a separate schedule. Applying them out of order produces a number that looks reasonable and is wrong in a way the client cannot detect. The at-risk and passive guide covers the second and third gates.
What to keep in the file
One page: the opening figure with its source, the K-1 components with the page each came from, the liability movement as a delta rather than a balance, and the closing figure. Next year the opening line of that page becomes the beginning of the next one, which is why an undocumented opening balance is a debt that gets paid with interest every season.
If the client's basis schedule has never existed, the first year you build one is the expensive one. The K-1s from that year onward are the evidence you will need, and the CSV export keeps one row per box with the page reference so the reconstruction can be shown to a reviewer instead of asserted.
Plain answers
Questions about outside basis
Is outside basis the same as my capital account on the K-1?
No. The capital account is kept by the partnership and is affected by items the partner's basis is not, and the reverse. A capital account can be negative; outside basis cannot go below zero, because a distribution or loss beyond basis is treated differently. Using one as a proxy for the other is the most common basis error in a small firm.
Where do I get the beginning balance?
From the prior year's basis schedule, if one exists. If it does not, the beginning figure has to be reconstructed — starting from the partner's initial contribution plus prior years of K-1s — and that reconstruction is a judgement you should document rather than a number you should pick. Once reconstructed, it becomes the beginning figure that every later year depends on, so it is worth doing properly once.
What happens when a loss is more than the basis allows?
The excess is not deductible this year. It carries forward and becomes deductible when basis is restored, subject to the at-risk and passive activity rules that apply on top. The K-1 will not show the limit, because the partnership does not know the partner's basis.
Does a liability change really move basis with no cash moving?
Yes. A partner's share of partnership liabilities is treated as part of the investment, so when that share rises basis rises, and when it falls basis falls. A partner who guarantees a new loan can find their basis increasing without receiving a dollar, and a partner whose share drops can find a taxable gain with no distribution at all.
Is there an official form for partnership outside basis?
There is not one equivalent to the shareholder basis form used for S corporations. Partnerships report tax basis capital accounts on the K-1 and the software carries basis worksheets, but the partner's outside basis remains the partner's own computation. Confirm in your own package how it stores the opening figure, because that is where a stale number persists year after year.
Every component, with the page it came from
K1 FastTax reads the boxes that move basis from a K-1 PDF into one row per box, with the page reference kept so a basis schedule can be built from evidence rather than memory.