A partner’s basis worksheet is the running record of your outside basis in a partnership, and you are the one who has to keep it. The IRS publishes the form to use, called the “Worksheet for Adjusting the Basis of a Partner’s Interest in the Partnership,” inside the Partner’s Instructions for Schedule K-1 (Form 1065), but the partnership itself will not calculate the number for you.1Internal Revenue Service. Partner’s Instructions for Schedule K-1 (Form 1065) Get it wrong and you can overpay tax, deduct losses you were not entitled to, or miss the point at which a cash distribution becomes taxable.
What the Worksheet Is Actually Measuring
The worksheet tracks your outside basis: your personal tax basis in the partnership interest itself. That is different from inside basis, which is the partnership’s basis in the assets it owns. The two start equal when the partnership forms and drift apart over time as interests change hands, debt is taken on, or elections are made.2Internal Revenue Service. Partner’s Outside Basis
Your Schedule K-1 may show a capital account analysis in Item L. That figure is not your outside basis. The capital account reflects your equity in the partnership’s net assets; your outside basis also includes your share of partnership debt. Partners who treat the Item L number as basis and file from it end up with the wrong return. The worksheet exists because no single line on the K-1 gives you the answer.
Why the Number Matters
Outside basis controls three things on your return: how much of the partnership’s losses you can actually deduct, whether the cash you receive from the partnership is tax-free, and how much gain or loss you recognize when you sell your interest.
You are required to adjust the number every year based on contributions, distributions, and your share of partnership income or loss.3Office of the Law Revision Counsel. 26 US Code 705 – Determination of Basis of Partner’s Interest Losses are deductible only up to your adjusted basis at the end of the partnership’s tax year; anything over that is suspended and carries forward until basis rebuilds.4Office of the Law Revision Counsel. 26 US Code 704 – Partner’s Distributive Share – Section: Limitation on Allowance of Losses
Cash distributions follow the same ceiling. A distribution is generally tax-free while it stays within your basis; the moment it exceeds basis, the excess is a capital gain.5Office of the Law Revision Counsel. 26 USC 731 – Extent of Recognition of Gain or Loss on Distribution Missing that gain can bring a 20% accuracy-related penalty on the underpayment.6Office of the Law Revision Counsel. 26 US Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments
How to Fill It In
The worksheet has a simple shape. Start with last year’s ending basis, add the items that increase it, then subtract the items that decrease it. Order matters, because basis cannot drop below zero and the sequence decides which losses get suspended.
Your Starting Point
If you are continuing in the partnership, your beginning basis is the ending figure from last year’s worksheet. If this is your first year, your starting basis is the cash you contributed plus the adjusted basis of any property you contributed, not the property’s market value.7Office of the Law Revision Counsel. 26 USC 722 – Basis of Contributing Partner’s Interest Contribute equipment you bought for $50,000 that is now worth $80,000 and your starting basis is $50,000.
Increases
To the starting figure, add your share of the partnership’s taxable income: ordinary business income and the separately stated items on your K-1 such as interest, dividends, and capital gains. Add your share of tax-exempt income too. That last one sounds counterintuitive, but it prevents you from being taxed later when the partnership distributes the cash tied to income that was never taxable to begin with.3Office of the Law Revision Counsel. 26 US Code 705 – Determination of Basis of Partner’s Interest Then add any increase in your share of partnership liabilities.
Decreases
After all the increases are in, subtract distributions. Box 19 of your K-1 reports them by code: Code A for cash and marketable securities, other codes for property and for deemed distributions arising from debt relief.1Internal Revenue Service. Partner’s Instructions for Schedule K-1 (Form 1065) Distributions reduce basis but never below zero.8Office of the Law Revision Counsel. 26 USC 733 – Basis of Distributee Partner’s Interest
Then subtract your share of partnership losses and deductions, along with your share of nondeductible expenses that are not capital expenditures. Items like Section 179 deductions and foreign taxes have their own handling instructions in the K-1 guidance; follow them line by line rather than lumping them in. If your subtractions would take basis below zero, stop at zero and suspend the excess losses until future income or contributions rebuild it.
The bottom line on the worksheet is your ending outside basis. Carry it forward as next year’s starting point.
Don’t Forget Partnership Debt
The debt piece is the one partners most often leave off, and it can move the number by a lot. When the partnership takes on a liability, your share of it increases your outside basis, treated as if you had contributed cash. When the partnership pays that debt down or you are relieved of your share, your basis drops, treated as if the partnership had distributed cash back to you.9Office of the Law Revision Counsel. 26 US Code 752 – Treatment of Certain Liabilities
How much of a given liability lands on your worksheet depends on whether it is recourse or nonrecourse. Recourse debt is allocated to whichever partner bears the economic risk of loss on repayment. Nonrecourse debt, where no partner is personally liable, is generally split among partners according to profit-sharing ratios.
Debt is also the reason your outside basis usually differs from your capital account. A partnership carrying substantial borrowing can give partners much higher basis than their capital accounts show. That added basis supports larger loss deductions, but a debt paydown works in reverse: the deemed distribution can push you past your remaining basis and trigger a tax bill you were not expecting.
If You Received the Interest by Gift or Inheritance
Not every partner starts with a cash check. If your interest was a gift, your starting basis is generally the donor’s adjusted basis at the time of the gift, a carryover basis.10Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust If the donor’s basis was higher than the interest’s fair market value on the date of the gift, your basis for computing a loss is limited to that lower value. You need the donor’s basis figure to fill in the worksheet honestly; without it, every future year is built on a guess.
If you inherited the interest, your starting basis is generally the fair market value on the date of death.11Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent That step-up applies to outside basis and often wipes out built-in gain. The executor or the partnership’s tax advisor should be able to give you the valuation you need for your first worksheet.
Basis Isn’t the Only Loss Limit
Clearing the basis hurdle does not automatically make a loss deductible. Losses that pass the basis test still have to pass the at-risk rules, and they will often be reduced further. Your share of nonrecourse partnership debt raises your outside basis but generally does not count as at-risk, so your deductible loss can be smaller than basis alone suggests.12Office of the Law Revision Counsel. 26 US Code 465 – Deductions Limited to Amount at Risk Losses from an activity in which you do not materially participate then face the passive activity rules, and remaining net business losses over the annual threshold are converted to a net operating loss carryforward under the excess business loss rule.13Internal Revenue Service. Publication 925 – Passive Activity and At-Risk Rules Each filter applies to what survived the last one. Track where a suspended loss got stuck; the rules for releasing it depend on which stage stopped it.
Filing, Record-Keeping, and Why You Never Throw It Out
The completed worksheet is not attached to your Form 1040. The ending basis figure feeds into what you report on Schedule E and, if losses are involved, on Form 6198 for at-risk limitations.14Internal Revenue Service. About Form 6198, At-Risk Limitations The worksheet itself lives in your files as backup.
The general IRS record retention rule of three years from the date you filed does not fit basis worksheets.15Internal Revenue Service. How Long Should I Keep Records Basis is cumulative; each year is built on the last. Lose a prior worksheet and you cannot prove the starting point for any year after it. Keep every worksheet, every K-1, and every contribution and distribution record for as long as you hold the interest and for at least three years after you dispose of it. When you eventually sell or the partnership liquidates, the full chain is what supports the gain or loss on the final return.