Partnership Basis

[DTS]

I have a couple of clients who started a partnership in '05. One of them has contributed property in the form of all the office furniture and equipment totaling approximately $18,000. The other one has contributed nothing, yet, but is running all the day to day activities with the other partner.

This partnership will have fairly large losses this first year and probably, next year. They both have very large incomes, so these losses will need to be written off for each.

My first question: Can the second partner just contribute about $20,000 into the partnership bank account on or before 12/31/05 so he can deduct losses up to his new basis of $20,000 or is it more complicated than this? Second question: Is this done all the time and are there any implications of doing this I should be aware of?

Thanks, Dennis

[Bees Knees]

There is no problem contributing cash to the partnership to increase basis. You can do that on the last day of the year.

I don't know if it is done all the time, but the only implication for doing it would be that the money is now tied up inside the partnership. If the partner did it simply to take the deduction, now he or she has to wait for something else to increase basis, such as income, before the money can come back out.

For example. Say he contributes $20,000 on December 31, 2005, and there are $20,000 of losses he can deduct as a result of this increase in basis. Now his basis is back to zero ($20,000 contribution minus $20,000 loss). If he were to take a $10,000 distribution the following year and there was no income to increase his basis, then the $10,000 would be taxable as an excess distribution.

[DTS]

One more question

Bees,

Thank you for your help.

If this were your client, what would your advice be to him, keeping in mind these two gentleman have the capability and probability of making two to three million in just a couple of years?

Thanks, again, Dennis

[Bees Knees]

Well, when you put it that way, my thought is to not worry about taxes. My thought is to make sure they both contribute what is fair to their ownership percentage of profits. If you make $3 million in profits, $20,000 in capital contributions seems small. Yet, if one thinks he deserves half of that profit, but the other guy is the one who risked all his money in the early stages, I think that could create potential problems between the two. My advice is, if there is going to be a lot of money coming down the line, make sure each is equally contributing money and time in proportion to the ownership of those future profits.

[Unregistered]

Were did the money come from to generate the loss? It sounds as if their are debts involved. If these are recourse debts, then each partner has additional basis for loss.

[DTS]

Loss

They have huge expenses getting this business off the ground with income below that. I don't know what the loss will be, just that they told me last month that so far, they were in the red and would probably finish with a loss for the year.

They are in a business that, each year, shows a huge gross income, which is why I told Bees $2-3M per year.

Dennis

[Unregistered]

My question is: How were the expenses paid.

[DTS]

???

After I read your post this afternoon, I gave the business a call to find out more on this setup, but was unable to reach anyone. Sorry I don't know more at this point.

What I do know is there is a checking account and no loans were taken out for this business. They had immediate income that they have using to pay bills. I asked one of the partners how things were going and was told they would have big losses this year. This is when I asked what his investment in the business was.

Obviously, if either of the them are taking money from their own pocket to pay bills, that will increase their basis. I was not thinking in those terms and should have been.

Let me find out more next week, if I can, and post again.

Thanks, Dennis