2.4.3. Factors That Increase or Decrease Tax Basis
A limited partnership or LLC will increase its tax (adjusted cost) basis by making improvements and building additions that add value to the asset. Capital gains from the sale of an asset also add to basis, as do the following:
• taxable income
• additional cash and non-cash (e.g., stock or bond) contributions
• increase in recourse and non-recourse debt
A partner’s share of the liabilities of a partnership or LLC is treated as a cash contribution to the partnership, including both recourse and non-recourse debt. Recall that a recourse liability is one for which any partner bears the risk of loss; the creditor bears the risk of a non-recourse liability.
Tax basis decreases when a partnership or LLC has taxable losses, receives cash or non-cash distributions, or decreases its amount of recourse or non-recourse debt. The company’s operating expenses also decrease tax basis, including depreciation, depletion, and amortization.
Example: Arnie and Mack form A&M LLC. Arnie contributes $150,000 in cash, while Mack contributes land worth $200,000 in the market that has a mortgage of $50,000. The company borrows $300,000 to finance construction of a building. Outside basis is as follows:
|
Basis Components |
Arnie |
Mack |
A&M LLC |
|
Cash contribution |
$150,000 |
$150,000 |
|
|
Basis in land |
$150,000* |
$150,000 |
|
|
Share of debt |
$25,000 |
$25,000 |
$50,000 |
|
Share of loan |
$150,000 |
$150,000 |
$300,000 |
|
TOTAL |