Question

Explain to a business owner who doesn't understand tax, in 3-5 sentences. Give examples and expand where necessary.

Explain the importance of a partner's tax basis.

Answer 1

• Tax is a compulsory contribution to state revenue, levied by the government on workers' income and business profits, or added to the cost of some goods, services, and transactions. It may be direct tax or indirect tax.

Direct tax is a tax, such as income tax, which is levied on the incomeor profits of the person who pays it, rather than on goods orservices.

• Indirect Tax is levied on goods and services rather than on income or profits

A partner's tax basis in the partnership generally equals the adjusted basis of property contributed or cash paid plus any income recognized by the partner on the formation of the partnership.Such income may arise from services performed in exchange for the partnership interest. The member's basis is adjusted each year for his share of the entity's income or loss. Generally, the adjustment cannot reduce tax basis below zero. The member's basis is also reduced for distributions, and increased by the member's share of partnership income.partner's tax basis is increased to the extent the partner's share of the liabilities of the partnership increases. The partner's tax basis is decreased to the extent the partner's share of partnership liabilities is considered to have decreased.