Partnership Basis Calculator (Outside Basis, Section 704(d) Loss Limitation)

A partner's outside basis is their adjusted basis in the partnership interest itself, as opposed to the partnership's inside basis in its own assets. It is the single number that decides three separate questions every year: how much partnership loss the partner may actually deduct, whether a cash distribution is a tax-free return of capital or a taxable gain, and how much gain or loss arises when the interest is eventually sold.

Outside basis is not the capital account on the K-1. The two diverge the moment partnership liabilities enter the picture, because section 752(a) treats an increase in a partner's share of partnership debt as a contribution of money, and section 752(b) treats a decrease as a distribution of money. A partner who wrote no cheque at all this year can gain basis simply because the partnership borrowed. A partner who received no money at all can be taxed because the partnership repaid a loan. Capital accounts do not behave that way, which is why relying on them is one of the most common ways to get this wrong.

This calculator runs one year of the basis waterfall in the order the statute requires, and reports what the loss limitation of section 704(d) does to the year's loss.

The engine runs a strict five-step waterfall. Everything is floored at zero: basis can never go negative.

where $B_0$ is opening basis, $I$ the total section 705(a)(1) increases, $D$ the total distributions including deemed distributions, $N$ the nondeductible non-capital expenditures and $L$ the loss.

Step 1 -- Start from the opening outside basis. The basis carried in from last year, floored at zero: $50,000

Step 2 -- Add every section 705(a)(1) increase. Contributions under section 722, the distributive share of taxable income, tax-exempt income under section 705(a)(1)(B), and the section 752(a) liability increase are summed: $0 + $0 + $0 + $20,000 = $20,000 of total increases

Step 3 -- Carry that to the basis before any decrease. $50,000 + $20,000 = $70,000

Step 4 -- Subtract distributions, including the section 752(b) deemed distribution. Cash distributions plus any decrease in the liability share are added together first: $30,000 + $0 = $30,000 of total deemed distributions

Step 5 -- Test for section 731(a)(1) gain. Gain arises only to the extent distributions exceed basis: $\max(0,\ \$30{,}000 - \$70{,}000) = $$0 of gain

Step 6 -- Reduce basis by the distributions, floored at zero. $\max(0,\ \$70{,}000 - \$30{,}000) = $$40,000 available to absorb loss

Step 7 -- Total the demand on that remaining basis. Nondeductible non-capital expenditures plus the loss available (the current-year share plus any suspended loss carried in): $0 + ($25,000 + $0) = $25,000 of demand

Step 8 -- Compare demand against basis available. $25,000 demand is less than or equal to $40,000 available, so both the expenditures and the whole loss are absorbed in full. Loss allowed: $25,000. Loss suspended: $0.

Step 9 -- Compute the closing basis. $40,000 − $0 − $25,000 = $15,000

If demand had exceeded the basis available, the engine would instead apportion the remaining basis between the nondeductible expenditure and the loss pro rata, then suspend the unabsorbed loss indefinitely under section 704(d). That pro-rata split is a modelling assumption and is disclosed below.

Take a partner in a leveraged real estate LLC. Opening basis $50,000. The partnership refinances, and the partner's allocated share of the new nonrecourse debt rises by $20,000. The partnership distributes $30,000 of refinancing proceeds to the partner in cash. The K-1 reports a $25,000 loss.

Step 1 -- Opening basis. $50,000

Step 2 -- Section 752(a) deemed contribution. The $20,000 rise in the liability share is treated as a cash contribution even though no cash moved: $50,000 + $20,000 = $70,000

Step 3 -- Distributions. $30,000 of cash, plus $0 of liability relief: $30,000

Step 4 -- Gain test under section 731(a)(1). $30,000 distributed is less than $70,000 of basis, so: $0 of gain -- the distribution is a tax-free return of capital

Step 5 -- Basis after distributions. $70,000 − $30,000 = $40,000

Step 6 -- Loss limitation under section 704(d). $25,000 of loss against $40,000 of basis: $\min(\$25{,}000,\ \$40{,}000) = $$25,000 allowed, $0 suspended

Step 7 -- Closing basis. $40,000 − $25,000 = $15,000

Now change one input. Suppose the partnership had instead paid down $75,000 of debt and the partner's liability share fell by that amount. Section 752(b) makes that a deemed cash distribution of $75,000 against $50,000 of basis, so the partner recognises $25,000 of section 731(a)(1) gain, basis drops to zero, and the entire $25,000 loss is suspended -- a tax bill and a lost deduction in the same year, from a transaction in which the partner received nothing at all.

• The at-risk limitation of section 465 and the passive activity loss limitation of section 469. Both apply after section 704(d). A loss this page reports as allowed can still be suspended by either of them, and nonrecourse debt that gives basis under section 752 frequently gives no at-risk amount at all.
• The pro-rata split when basis cannot cover both the loss and the nondeductible expenditure is a modelling choice, not a verified rule. The ordering rule in Treas. Reg. 1.704-1(d)(2) could not be retrieved from a primary source during this build, so the primitive apportions the remaining basis between the two pro rata. Where basis covers both -- the ordinary case, and the default case shown here -- the choice changes nothing.
• The character of the suspended loss. Capital and ordinary items are not tracked separately, and section 704(d)(3)'s special ordering for charitable contributions and foreign taxes is not applied.
• Distributions of property rather than money. Property distributions carry over basis under section 732 instead of triggering section 731(a)(1) gain, and are outside this model.
• Whether the liability allocation itself is correct. The split of recourse and nonrecourse debt under Treas. Reg. 1.752-1 through 1.752-3 is assumed; you enter the result, not the reasoning.

• Using the capital account instead of outside basis. They are different numbers computed under different rules. A tax capital account of zero does not mean outside basis is zero, and vice versa.
• Deducting a loss the basis cannot support. Section 704(d) allows loss only to the extent of basis at year end. The excess is not lost, but it is not this year's deduction either.
• Forgetting that distributions come out of basis before losses do. The ordering is not optional. A large distribution can consume the basis a loss needed, converting a deductible loss into a suspended one.
• Assuming debt paydown is tax-neutral. A decrease in the liability share is a deemed distribution. Partnerships that deleverage routinely generate phantom gain for partners whose basis was already thin.
• Ignoring tax-exempt income. Section 705(a)(1)(B) adds it to basis even though it is never taxed, which is precisely why it is easy to leave out.
• Treating a suspended loss as expired. The section 704(d) carryforward is indefinite and follows the partner. It is released the moment basis reappears, whether from income, a contribution or a new liability share.

• 26 U.S.C. 705(a) -- basis increased by the distributive share of income and tax-exempt income, decreased but not below zero by distributions, losses and nondeductible non-capital expenditures. https://www.law.cornell.edu/uscode/text/26/705
• 26 U.S.C. 722 -- basis of a contributing partner's interest.
• 26 U.S.C. 752(a) and 752(b) -- an increase in the share of partnership liabilities is a deemed contribution of money; a decrease is a deemed distribution of money.
• 26 U.S.C. 731(a)(1) -- gain recognised to the extent money distributed exceeds the adjusted basis of the interest.
• 26 U.S.C. 704(d) -- loss allowed only to the extent of adjusted basis at year end, with the excess allowed in a later year to the extent basis is restored.

All statutory text verified 2026-08-30. No dollar figures appear in any of these sections; the entire computation is driven by the partner's own K-1.