Partner loan to partnership and basis

[BHoffman]

If a Partner makes a loan to his partnership, does that increase his basis?

Partner A made an initial capital contribution of $5 to the Partnership for 50% ownership.

Partner A then loaned $75 to the Partnership. The money came from his savings account.

The Partnership ended 2015 with a $60 loss.

Can Partner A deduct his $30 loss in the current year?

Thanks and sorry if this is very basic. I am a burned out mess today and so much better with SCorps than partnerships

[DaveinTexas]

Not an Expert???

You mean to tell me you're not a Partnership expert???

Only kidding, if someone ever told me they were a Partnership expert, I would expect they also have ocean front property for sale in AZ!

I would tell you that a loan does increase the partner's basis BUT this basis would be shared with the other partners in the partnership, according to their % share (% share of recourse debt). That is my initial thought regarding a partner loan, but again, I am no expert in these matters.

I would advise the client to change the structure from a loan to a capital contribution instead. This way the only partner that gets credit (basis increase) is the contributing partner. And, if a loss is the result, the partner would absorb the loss through his basis increase and deduct it on his Individual Return.

The same rationale (save for the sharing of the increase in share of liability among the shareholders) can be used in an S Corp, but mainly for purposes of not having to track the loan, interest payments, promissory note, etc, etc.

Just my 2 cents.

[BHoffman]

Thanks Dave! Darn it that the partner doesn't want to make it as a capital contribution. I wanted that so very much because it is clear and easy. Clarity and ease are so rare with partnership tax returns, and I am a simple woman.

The other partner is limited and has no obligation to personally repay Partner A, so I put it as a recourse debt 100% to Partner A. I think partner A is 100% "at-risk" as well and can use the debt basis to take his entire share of the loss in the current year.

Sure hope if anyone disagrees, they will set me straight

I'll be enjoying the beach on the shores of the Maricopa County ocean.

[Gretel]

I believe in the end it boils down to who is at risk and has the legal obligation to repay. Right or wrong, I treated some personal credit cards used by one partner that way. Partnership could not get CC in their name, only one partner could, and I didn't see how the other partner was effected by it in the real world. ...and this is how it needs to be reported on the tax return, right?

[Roland Slugg]

What's his objection to treating it as a contribution to the p'ship? As such his basis is increased by the amount of the loan. The p'ship agreement should say that additional contributions to the p'ship shall receive priority in the event of distributions, whether liquidating or non-liquidating, and if the agreement doesn't say that, it should be amended so it does.

[BHoffman]

I'll be talking to the client today about that. He is of the opinion that he cannot be repaid from a capital contribution and I'm blue in the face from explaining that he can. He brings up the promissory note and the interest. The agreement allows for capital contributions and distributions. He isn't concerned with the timing of when he takes the loss, so a carryover doesn't bother him. It bothers me because this was a very high income year for him and his wife on their 1040 and it would be nice to apply this loss now.

Roland, if he insists on keeping it as a loan would you say that it is a recourse loan, increases his basis, he is 100% at risk, and can take the loss?

Thanks to all for your advice.

[BHoffman]

Well I can't find a cite, but have found info that indicates this loan from the partner is all recourse to him and does increase his basis.

If anyone disagrees, I'd be grateful for your comments.