Outside Basis

What is outside basis?

Outside basis is a partner's tax basis in their partnership interest. It tracks what that specific partner has invested, earned, been allocated, and withdrawn. Outside basis determines how much loss a partner can deduct, whether distributions are tax free, and the gain or loss on selling the interest. Each partner has their own outside basis, and it rarely matches what the capital account statement shows.

What moves it up and down

Capital contributions and allocated income increase outside basis. Allocated losses, distributions, and nondeductible expenses decrease it. A partner's share of partnership debt also increases outside basis, which is why partnerships can pass through losses in excess of cash invested. Basis cannot go below zero. When allocated losses exceed basis, the excess suspends until basis is restored.

Why partners should track it themselves

The partnership reports a capital account on the K-1, but capital accounts follow book or tax capital rules and exclude debt share, so they are not basis. Partners who rely on the K-1 alone can misjudge how much loss they can take or whether a distribution is taxable. Keep a running schedule from the year you joined. Reconstructing a decade of basis during a sale negotiation is expensive and often inconclusive.