Figures: tax year 2026
Outside basis is one input in an interest-sale calculation, but the sale also requires a separate ordinary-income classification.
- On a sale of a partnership interest under §751(a), all inventory items count, appreciated or not.
- On a sale of an interest, §751(a) reaches unrealized receivables and all inventory items.
The examples of cash distributions to a partner retain their stated assumptions. This narrow interest-sale boundary does not supply a full sale-gain calculation or the separate rules for disproportionate distributions.
Common mistakes
- Reversing liability relief. Adding the $8,000 decrease in Example 2 produces $85,000 + $8,000 + $8,000 = $101,000, replacing an $8,000 subtraction with an $8,000 addition.
- Prorating an individual distribution. Using $15,000 x 40% = $6,000 understates Maya's basis reduction; the resulting wrong basis is $85,000 + ($15,000 - $6,000) = $94,000.
- Omitting exempt income. Excluding Maya's exempt-interest allocation gives $85,000 - $2,000 = $83,000, despite the income's required basis effect.
Bottom line
- Outside basis measures the partner's tax investment and requires a worksheet separate from the reported capital account.
- Cash contributions and allocated taxable and tax-exempt income increase outside basis.
- Cash distributions, nondeductible noncapital expenditures, and permitted loss or deduction allocations reduce outside basis.
- Increased qualifying liability shares are deemed contributions; decreased shares are deemed cash distributions.
Exam shortcut
Mark every amount as partnership-wide or partner-specific before applying a percentage. Use the agreement for allocations and the payment record for an individual cash receipt. Write beginning and ending liability shares beside each other. Subtract once, then place a positive change among additions or a negative change with deemed distributions. Check the measurement date when a stem supplies multiple transactions.
The full lesson (about 5,517 words, 37 min read) adds 8 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- V.D2
Browse all free CPA REG lessons or jump into free CPA REG practice questions.