Question

The KL Partnership is owned equally by Kayla and Lisa. Kayla's basis is $20,000 at the beginning of the tax year. Lisa's basis is $16,000 at the beginning of the year. Assume that partnership debt did not change from the beginning to the end of the tax year. KL reported the following income and expenses for the current tax year:

Sales revenue $100,000 Cost of sales 80,000 Distribution to Lisa 15,000 Depreciation expense 20,000 Utilities 14,000 Rent expense 18,000 Long-term capital gain 6,000 Payment to Mercy Hospital for Kayla's medical expenses 12,000

If an amount is zero, enter "0".

a. Determine the ordinary partnership income and separately stated items for the partnership.

The partnership's loss is $. The separately stated income items total $.

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The measurement and reporting of partnership income require a two-step approach. Certain items must be netted at the partnership level, and other items must be segregated and reported separately on the partnership return and each partner's Schedule K-1.

b. Calculate Kayla’s basis in her partnership interest at the end of the tax year. What items should Kayla report on her Federal income tax return?

Kayla's basis in her partnership interest at the end of the tax year is $. She reports the following items on her Federal income tax return: Share of loss and long-term capital gain

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Partially correct

c. Calculate Lisa’s basis in her partnership interest at the end of the tax year. What items should Lisa report on her Federal income tax return?

Lisa's basis in her partnership interest at the end of the tax year is $. She reports the following items on her Federal income tax return: Share of loss and long-term capital gain

Answer 1

a) Determination of the ordinary partnership income and separately stated items is shown as follows:-

(Amount in $)

Sales Revenue	100,000
Cost of Sales	(80,000)
Depreciation Expense	(20,000)
Utilities	(14,000)
Rent Expense	(18,000)
Total Ordinary loss	(32,000)
Separately Stated Items:
Long-term Capital Gain	6,000

Therefore, partnership would report an ordinary loss from operations of $32,000. Each partner's share of loss is $16,000 ($32,000/1/2).

Working Notes:-

1) The distribution to Lisa is not deductible by the partnership. The payment to Mercy hospital for Kayla's medical expenses is treated as a distribution to Kayla in the amount of $12,000. Kayla may be able to claim a deduction for medical expenses on her personal tax return.

b) Calculation of Kayla's basis at the end of tax year (Amount in $)

Baginning Basis	20,000
Share of separately stated income items:
Long term capital gain (6,000*1/2)	3,000
Basis before loss allocation and distribution	23,000
Less: Distribution (partnership payment of medical expenses)	(12,000)
Basis before loss allocation	11,000
Less: Ordinary loss allowed under § 704(d)	(11,000)
Ending Basis in Interest	0

Kayla's ordinary loss from the partnership is limited under § 704(d) to $11,000 (as basis can not be negative). The remaining $5,000 ($16,000-$11,000) ordinary loss is carry forward until such time as Kayla has sufficient basis in her partnership interest to utilize the loss.

c)  Calculation of Lisa's basis at the end of tax year (Amount in $)

Baginning Basis	16,000
Share of separately stated income items:
Long term capital gain (6,000*1/2)	3,000
Basis before loss allocation and distribution	19,000
Less: Distribution	(15,000)
Basis before loss allocation	4,000
Less: Ordinary loss allowed under § 704(d)	(4,000)
Ending Basis in Interest	0

Lisa's basis is $4,000 lower than kayla's basis and the distribution Lisa received is $3,000 higher than the indirect distribution to Kayla, so Lisa's deductible loss is $7,000 less than Kayla's. Lisa may only deduct $4,000 of the loss. The remaining $12,000 ($16,000 - $4,000) loss is carried forward.