If you are a owner of an interest partnership, LLP, LLC, or S-Corporation, you should have heard the term "outside basis". It is an important calculation and it is your responsibility to track it, not the business. It is important because if in the future you sell your interest in the business, your gain or loss will be computed based on the sale price less your "outside basis". Also, depending on the business organization type (LLC, S-Corp, etc.), your ability to take losses from the business as deductions on your individual tax return is affected by your "outside basis". Here is what "outside basis" consists of at any given time which, by the way, almost never equals your "capital account":
Your share of .........
Your original investment, or "purchase" price
+ Basis of any property you contribute to the business
+ Taxable gains you may recognize on that contribution of property
+ Liabilities you assume as well as increases in the business' liabilities (these vary by organization type)
+ Taxable income of the business including capital gains
+ Tax-exempt income of the business
- Liabilities that the business assumes
- Decreases in business liabilities
- Business losses and capital losses
- Nondeductible business expenses (that are not capital expenses)
- Section 179 expenses
- Basis of any property you receive from the business
If you are a owner of an interest partnership, LLP, LLC, or S-Corporation, you should have heard the term "outside basis". It is an important calculation and it is your responsibility to track it, not the business. It is important because if in the future you sell your interest in the business, your gain or loss will be computed based on the sale price less your "outside basis". Also, depending on the business organization type (LLC, S-Corp, etc.), your ability to take losses from the business as deductions on your individual tax return is affected by your "outside basis". Here is what "outside basis" consists of at any given time which, by the way, almost never equals your "capital account":