Joey and Bob each have 50% interest in a Partnership.Both Joey and the partnership file returns on a calendar year basis.Partnership Q had a $12,000 loss in 2013.Joey's adjusted basis in his partnership interest on January 1,2013 was $5,000.In 2014,the partnership had a profit of $10,000.Assuming there were no other adjustments to Joey's basis in the partnership,what amount of partnership income (loss)should Joey show on his 2013 and 2014 individual income tax returns?

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Quizplus · Accepted Answer

In 2013, Partnership Q had a $12,000 loss which is split equally between Joey and Bob, resulting in a $6,000 loss for Joey. This loss can be used to reduce Joey's adjusted basis in his partnership interest from $5,000 to -$1,000.

On Joey's 2013 individual income tax return, he should show a loss of $6,000 from the partnership, bringing his adjusted basis to -$1,000.

In 2014, the partnership had a profit of $10,000 which is split equally between Joey and Bob, resulting in a $5,000 profit for Joey. However, since Joey's adjusted basis in his partnership interest is -$1,000, he cannot use this entire profit to increase his basis. Instead, he can only use enough of the profit to bring his basis back to zero.

To do this, Joey must take the $6,000 loss from 2013 and subtract it from his share of the 2014 profit of $5,000. This results in $1,000 that can be used to increase Joey's basis from -$1,000 to $0.

Therefore, on Joey's 2014 individual income tax return, he should show a profit of $1,000 from the partnership, bringing his adjusted basis back to $0.

Joey and Bob Each Have 50% Interest in a Partnership