Question

On January 1, Year 1, Marla, Jackson, and Helena started a partnership for a silk-screen t-shirt shop called Smar-Tees and are all active in the management of the company. The company uses a calendar year tax period. Marla, Jackson, and Helena’s initial outside tax bases in their partnership interests were $5,000, $50,000, and $60,000, respectively. These bases include all relevant property contributed and debt allocations from the date of initiation. On the date the partnership was initiated, the only debt for the partnership was a $10,000 loan the business took out directly (was not assumed from one of the partners) on January 1, Year 1. Helena had signed the loan document with the bank on behalf of the partnership, making herself the only partner personally liable for the debt should the business be unable to pay the debt with its profits alone. Marla, Jackson, and Helena’s profits interests were 25%, 25%, and 50%, respectively. Since January 1, Year 1 (the date establishing the different outside basis amounts above), the business has been operating throughout Year 1 and had the following occur during the year:

•  $60,000 in t-shirt sales revenue

•  $2,000 in cash distributions to each partner

•  $40,000 in wages (all to employees other than partners)

•  $8,000 in utilities

•  $5,000 in payments related to the loan: $3,000 of which was interest and $2,000 that

  reduced the remaining principal owed (ignore limitations on interest deductions)

•  $400 for employee business meals throughout the year paid for by the company

• In the above scenario, what is the adjusted (ending) outside tax basis for each partner at the end of Year 1 ignoring any role of each partner’s QBI deduction?

	I.	Marla: $5,150. Jackson: $50,150. Helena: $60,300
	II.	Marla: $5,200. Jackson: $50,200. Helena: $53,600
	III.	Marla: $4,650. Jackson: $49,560. Helena: $61,300
	IV.	None of the above.

Answer 1