Jabari becomes a 40% interest partner in an accounting partnership on January 1, 2020. During the year ended December 31, 2020, the business earns income of $200,000 for accounting purposes. In arriving at this income figure, the bookkeeper deducted meals and entertainment costs of $20,000, and a charitable donation of $5,000. Jabari withdraws $50,000 from the partnership during 2020. As of January 1, 2021, his adjusted cost base will have increased by:
A)$30,000.
B)$38,000.
C)$34,000.
D)$24,000.

Question

Quizplus · Accepted Answer

Jabari's adjusted cost base increases by his share of the partnership's income, adjusted for non-deductible or differently treated items for tax purposes. The partnership's income is $200,000. Meals and entertainment costs are typically only 50% deductible for tax purposes, so $10,000 of the $20,000 would be added back. Charitable donations are usually fully deductible but are personal or directed deductions and do not reduce the partnership's income for determining a partner's adjusted cost base. Therefore, the income considered for Jabari's adjusted cost base is $200,000 + $10,000 = $210,000. Jabari's 40% share is $84,000. His withdrawals of $50,000 reduce his adjusted cost base. Thus, the increase in his adjusted cost base is $84,000 - $50,000 = $34,000.

Jabari Becomes a 40% Interest Partner in an Accounting Partnership