Bill's basis in his 20% interest in the BMW Partnership is $10,000 on the first day of the current tax year.The partnership reports "book" (GAAP)income of $60,000.The partnership "book" income is net of a deduction for a guaranteed payment made to Bill of $40,000.If there are no other differences between book and tax income,Bill's ending basis in his partnership interest is $22,000,and he reports income items from the partnership totaling $52,000.

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Bill's basis in his partnership interest increases by his share of partnership income, which is $12,000 (60,000 x 20%). However, since he received a guaranteed payment of $40,000, his share of partnership income is reduced to $20,000 ($60,000 - $40,000), and his basis in his partnership interest increases by $2,000 ($20,000 x 20%). Therefore, his ending basis in his partnership interest is $12,000 (initial basis) + $2,000 (increase in basis) = $22,000. He also reports income items from the partnership totaling $52,000 ($60,000 x 20% - $40,000), which agrees with his share of partnership income of $20,000.

Bill's Basis in His 20% Interest in the BMW Partnership