Question

Partnership P ("P") has two individual partners (A and B). Each are 50% owners in P. At the beginning of Year 1, A's outside basis was $1,000 and B's outside basis was $10,000. During Year 1 P earned $2,000 of income from operations, $1,000 of tax exempt income, and paid off $10,000 of a recourse liability. What income, gain or loss, if any, will A report on A's individual income tax return (for Year 1) as a result of being a partner in P?

Answer 1

Answer:

Given data,

Income from operations = $ 2000

Tax exempt income = $ 1000

This is mentioning about ownership ratio of 50% each. But profit sharing ratio is not mentioned. In absence of any information about profit sharing ratio, partners distributes profit & losses equally (i.e., 50%).

Total income of partnership P = Income from operations + tax exempt income

= $ 2,000 + $ 1,000

Total income of partnership P = $ 3,000

A's individual profit share from partnership to be reported in his income tax return = 3000 * 50%

= $ 1,500

Hence no income, gain/loss will be taxable in the hands of Mr.A's income tax return for year 1