Partner basis - liabilities

Can anyone assist - I'm working on a my first partnership client and reviewing prior year basis statement and noting that there is no data on the decrease/increase of liabilities line even though there was a change in their mortgage liability. Regardless of whether it is recourse or nonrecourse, my Proseries takes the change in the liability into account when recalculating the 2017 ending basis. I would have to override it to not have it.

The prior year tax balance sheet via Sch L has the mortgages info on line 19, mortgages. I even tried moving it around to the "nonrecourse" and even "other liabilities" line and I still get changes in the basis so I'm inclined to think that the prior preparer removed it from the basis calculation? I have several small S corps but they don't have the liability issue to deal with.

Can anyone assist - I'm working on a my first partnership client and reviewing prior year basis statement and noting that there is no data on the decrease/increase of liabilities line even though there was a change in their mortgage liability. Regardless of whether it is recourse or nonrecourse, my Proseries takes the change in the liability into account when recalculating the 2017 ending basis. I would have to override it to not have it.

The prior year tax balance sheet via Sch L has the mortgages info on line 19, mortgages. I even tried moving it around to the "nonrecourse" and even "other liabilities" line and I still get changes in the basis so I'm inclined to think that the prior preparer removed it from the basis calculation? I have several small S corps but they don't have the liability issue to deal with.

I use Proseries, but I don't use Proseries to keep track of basis in a partner's interest in a partnership. I prefer to do the calculations manually. The programmers of Proseries have written the program to make certain assumptions about which liabilities are recourse, nonrecourse, and qualified nonrecourse -- and the assumptions are often incorrect.

There are two categories of basis in a partner's interest in a partnership: debt basis and equity basis.

For debt basis, I manually do the analysis of how each liability affects each partner at the partner level. It is the effect on the partner -- not on the partnership -- that determines the liability allocation for purposes of disclosure on the K-1. A liability can be "recourse" as to the partnership and yet be "nonrecourse" as to the partners. Another liability can be "nonrecourse" as to the partnership and yet be "recourse" as to one or more partners.

When doing the "equity basis" calculations, you can't always rely on the capital account balance for a given partner as being equal to that partner's equity basis. The partner may have purchased his interest from another partner, and the purchasing partner's capital balance (at least, as shown on the K-1) might not be equal to his equity basis amount.

Also, for the section 465 "at risk" limitation rules (for purposes of disclosure on the K-1), if you are trying to categorize a liability as either "nonrecourse" or "qualified nonrecourse", you need to know whether the lender is in the business of lending -- and whether the collateral is real estate. The mere fact that the liability is secured by a mortgage on real estate does not necessarily mean that the liability is "qualified nonrecourse". If I recall correctly, the Proseries program just makes an assumption -- apparently based on where the mortgage liability is shown on the Schedule L -- that might not be correct. So, I use the special features in Proseries to input my own figures on "recourse," "nonrecourse," and "qualified nonrecourse."

LW, that's really good!

LW, that's really good!

Thanks. A few years ago I decided to really dig down into the whole recourse-nonrecourse debt thing for partnerships, with respect to allocations on the K-1s.

Another concept that struck me was the general rule that, at the partner level, a partnership debt is called either recourse or nonrecourse for determining basis.

What that seems to mean is that if at least partner has an economic risk of loss with respect to that particular debt, that debt is called "recourse" -- period. The fact that the other partners have no economic risk of loss for that debt does not make that debt be called "nonrecourse" as to those partners.

Once a given partnership debt is determined to be "recourse" at the partner level, it is allocated only to the partners having economic risk of loss for that debt. For the partners who have no economic risk of loss for that debt, again, that debt not called a "nonrecourse" debt; it's just a debt that is not allocated to them.

So, the term "nonrecourse" (for purposes of this specific tax law analysis) is used to describe only a partnership debt for which NO partner has ANY economic risk of loss.

So, at the partner level, for purposes of determining basis, the "recourse" and "nonrecourse" labels are essentially "all or nothing," at least with respect to a given dollar of debt --which brings us to a quasi-exception to the general rule. A specific debt could have both recourse components and nonrecourse components where at least one partner has an economic risk of loss with respect to only a part of the whole debt, and NO partner has any economic risk of loss with respect to the rest of the debt. It can be confusing.

Anyway, once a particular partnership liability is correctly classified as "recourse", the liability is allocated (for purposes of determining "debt basis") to the partner or partners who have an economic risk of loss with respect to that liability. In making the allocation, one has to consider which partner has the ultimate risk, after considering all guarantees, side agreements between two partners, etc.

Once a particular partnership liability is correctly classified as "nonrecourse", the liability is allocated among all partners -- i.e., to each partner based on his/her pro-rata share of partnership PROFITS.

If the partner is trying to determine whether he/she can deduct a loss on a partnership K-1, the partner first must make a determination as to whether he/she has enough basis in the partnership interest, using the debt basis and equity basis analyses described earlier.

If the partner passes the basis limitation test, he/she must then see if he/she passes the "at risk" limitation test of section 465. The partner will be considered "at risk" for the amount of equity basis plus the amount of debt basis attributable to recourse debt and qualified nonrecourse debt. Debt basis that comes from "regular" nonrecourse debt will not qualify as an amount "at risk."

If the partner passes the "at risk" limitation, then he/she must consider the passive loss limitation rules of section 469.