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REG CPA Practice Questions: Calculating Partner Basis
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May 3, 2024
In this video, we walk through 5 REG CPA exam practice questions teaching how to calculate a partner's basis in a partnership. Important Links Link to the free study training webinar mentioned in the video: https://www.superfastcpa.com/strategic-study See the full post for this video: https://www.superfastcpa.com/reg-cpa-practice-questions-explained-how-to-calculate-a-partners-basis-in-a-partnership/ See the other REG walkthrough videos here: https://www.superfastcpa.com/free-reg-cpa-practice-question-walkthroughs/ 00:00 Intro 00:49 Question 1: Calculating Basis Including Partnership Income and Cash Contributions 02:23 Question 2: Calculating Basis Including Partnership Income and Cash Contributions 04:09 Question 3: Recourse and Non-Recourse Debt 07:46 Question 4: Partnership Assuming a Partner's Liability 09:50 Question 5: Tax Basis and Capital Account 11:58 Pillar Topics
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Welcome to another reg walkthrough video. I'm Logan, and in today's video, we're going to be going over
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calculating partner basis, and we're going to be doing that the Superfast CPA way, which is diving
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straight into questions to learn the material. If you don't know much about our strategies
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make sure you go to superfast CPA.com and check out our free one-hour webinar training
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We go over the key ingredients to passing the CPA exam. Again, it's one hour, it's free
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and it will save you so much time struggling with your process. Go check it out. The link will be in the
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description. Also, if you like the idea of going through questions as your main learning material
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make sure you check out our Super Fast CPA app where we not only have audio notes, review notes
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follow-along notes, but we also have five-question mini quizzes that you can easily access on your phone
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all throughout your day so that you can continue practicing. With all that said, let's dive straight
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into the questions. Now, if I don't sound too good, I am coming down with a cold, sorry about that
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but let's go ahead and look at the first question here. Elina is a 25% partner in the NOP partnership
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The following is an excerpt from the NOP's income statement for the year
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Revenue of $100,000, salaries for $30,000, rent, $20,000, utilities $10,000, and other expenses of $5,000
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During the year, Alina made a cash contribution of $20,000 to the partnership
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Calculate Elina's basis in the partnership at the end of the year if her starting basis was $40,000
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Okay, this is the first question. You may not really know how to calculate partnership basis, so we're going to dive straight
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into the answer to learn how this works. Okay, and the answer is $68,750. So this is the walkthrough of the
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calculation. We start with her basis of $40,000, and then you calculate the net income, so you take the
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revenue less total expenses, and that was $35,000, and you take her percentage share of the partnership
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or percentage share of that income, and that is an increase to her basis. And then also, when she
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contributed cash to the company, that also raises her basis. So you take the $40,000 starting
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basis, add in her share of income, and add in the cash contribution that she gave to the company
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and that leaves you with $68,750. All right, pretty simple. The partner's share of income or loss
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from the partnership, that changes their basis. And if they contribute more cash to the partnership
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then that also increases their basis. Let's go to the next question. All right, here is question two
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Mariana is a 40% partner in the TQR partnership. At the start of the year, her basis in the partnership was $8,000
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During the year, TQR earned $25,000 in ordinary business income and $5,000 in interest income
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The partnership also took a deduction of $3,000 for business expenses. At year end, the partnership distributed $10,000 among the partners
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What is Marianna's basis in the partnership at the end of the year? Okay, this is pretty similar to what we just did, and honestly
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even though there's a distribution instead of a contribution, you could probably figure this out. So go ahead, pause the video
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see if you can figure out the correct answer based off of what you learned from the first question
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and when you're ready, come back, and we will look at the answer. Okay, and here is the answer, $14,800
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Again, it's very similar. Start with the starting basis of $8,000. Then you take her share of the ordinary income
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the interest income, the expenses, and her share of the distribution, and you add that altogether slash subtract what needs to be subtracted and that gives you that ending basis Now one thing I want to point out just to make sure that you always pay attention for this
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when it says that the partnership distributed among the partners, that's when you know that it's
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based off of percentage, but it could also say that it distributed a specific amount to
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Mariana. So just always pay attention to whether the partnership is saying they distributed a
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general amount, so you have to figure out the percentage, or if it was just $10,000
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was given to Mariana. So just make sure you look for that. But again, not too complicated. You just take
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the income, the expenses, however much the share was of that affects the partner's basis
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and then again, distributions will lower the basis of the partner. All right, let's go ahead and go to the next
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question. All right, here is question three. Carlos is a 30% partner in the ABC partnership
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which owns commercial real estate. At the beginning of the year, Carlos's basis in the partnership was
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$50,000. During the year, Carlos' basis in the partnership was $50,000. During the year, Carlos is a 30% partner, The year, the partnership took on a new loan of $90,000 to renovate its property, of which $60,000 is non-recourse, and $30,000 is recourse
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Carlos personally guaranteed the $30,000. There were no other distributions, and the partnership's operations broke even for the year
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Calculate Carlos' basis in the partnership at the end of the year considering these liabilities
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Okay, this is something new. Before it was just contributions, distributions, and income, or loss
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But now it's talking about liabilities of the partnership and how that might have
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affect the partner's basis. So since we don't know how to do this yet, let's go ahead and jump
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into the answer to see how this works. Okay, and the answer is $98,000. So again, let's go through
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this. To calculate Carlos's end of your basis in the partnership, consider the impact of both
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recourse and non-recourse liabilities, and we'll learn what those are in a second here. So you take
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the starting basis, $50,000. Then there's an increase from Carlos's share of recourse liabilities
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Carlos is personally liable for the recourse debt because he personally guaranteed it. This
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increases his basis by the $30,000. So because he personally guaranteed that part of the loan
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that increases his basis. And then there's an increase from Carlos' share
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of non-recourse liabilities. And this was just his share because it was non-recourse debt
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in general for the partnership. So we take his percentage, 30% of $60,000
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and that is his percentage share of the non-recourse liability, so $18,000
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So you add that all up together, and that is his tax basis of $98,000
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And by the way, in a couple questions, we are going to talk about tax basis versus capital account
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You know, they work together, obviously, in a partnership. And again, I'll talk about that in a second
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Now let's read about what recourse debt is and what non-recourse debt is. First, let's talk about recourse
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This type of debt holds the borrower personally liable. If the debt is not fully repaid from the sale of the secured asset, for instance, property
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the lender has the right to pursue the borrower's other assets or income to satisfy the remainder
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of the obligation. In a partnership, any recourse debt that a partner is responsible for
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increases their basis as they are personally at risk for this portion of the debt. Okay
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so they are personally liable for that debt. So if something bad happens, who's on the hook
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that partner specifically. Now let's talk about non-recourse debt. Non-recourse debt does not
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hold the borrower personally liable beyond the collateral specifically pledged for the debt
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If the proceeds from selling the secured asset do not cover the debt the land the land cannot pursue the borrower other assets In a partnership a partner share of non debt also increases their
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basis because it represents an additional risk that the partnership as a whole assumes
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but without personal liability for the partner. So again, non-recourse debt, the partnership as a whole is still liable
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So if something bad happens, they can come after the partnership for the things that were
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pledged as collateral specifically. But beyond that, they can't go. after each individual partner. Whereas for recourse debt, that partner is on the hook, so if something
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bad happens, they will come after that partner. In the end, recourse and non-recourse debt both
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increase the basis of a partner, but it is important to know that recourse debt means the partner
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is personally liable, and non-recourse debt means that they are not personally liable. They're just taking
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on the risk of the liability in general from being a partner in the partnership. All right, let's go
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ahead and go to the next question. Okay, here is question four. Diana is a 25% partner in the
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LMN partnership, which operates a boutique consultancy firm. At the beginning of the year, her basis
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in the partnership was $40,000. During the year, Diana contributed equipment valued at $20,000
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to the partnership. Simultaneously, the partnership took on Diana's $15,000 loan to pay for the
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equipment. During the year, the partnership earned $200,000 in net business income and distributed
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$50,000 in cash to the partners. What is Diana's basis in the partnership at the end of the year considering the partner's
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assumption of the loan? Okay, so this is pretty straightforward. However, how is them taking on her own loan going to affect her basis
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So if you want, go ahead and try to figure this question out, pause the video, and when
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you're ready, come back and we will look at the answer to see how this works
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Okay, the answer is $86,250. So let's go through this. Starting basis, $40,000
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It increases from the contribution of the equipment. However, let's consider the debt
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There is an adjustment for the debt taken by the partnership. The partnership assumes $15,000 of debt for this equipment
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Diana is still responsible for 25% of this liability because she is a 25% partner
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so her relief from the liability would decrease her debt. So whatever portion the partnership is now taking on actually decreases her gain in basis from the equipment
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because they are basically relieving her of a loan or a liability
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They're doing her a favor. So that relief from liability was 75% of the $15,000, which was $11,250
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You subtract that from the equipment contribution of $20,000. So in the end, she actually only gains a basis of $8,750 from donating that equipment
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And then there's the increase from the share of business income, which was $50,000, and a decrease from the general cash contributions that was made
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mentioned, and so that leaves her with the basis of $86,250. Okay, let's go to the last question in the video
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All right, here is question five. Simone is a 30% partner in the Coral Reef Partnership, which operates a small retail business
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The partnerships financials for the year are as follows. Capital contributions. Simone contributed $25,000 during the year
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They had income of $200,000. The partnership had expenses of $50,000. They had liabilities of new non liabilities of and there was a year distribution of to Simone So at the beginning of the year her capital account was so we need to figure out what
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her tax basis is at the end of the year. All right, we've gone through a lot in this video
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Go ahead and pause the video, see if you can calculate the correct answer, and when you're
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ready, come back, and we will look at the answer together. Okay, and the answer is $130,000
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And I wanted to save this question for last because I did want to point out that there is a difference between the capital account of a partner and the tax basis of a partner
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And we'll learn about that here. So their starting capital account was $40,000
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And then you take Simone's contribution, you take her share of the net income, you take her share of the expenses, and you take her distribution
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And again, this wasn't listed as a share. This was just $10,000 that was distributed to her
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That gives you the end of the year capital account of $100,000. And then you add on her share of liabilities, and that gives you the tax basis
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So I just wanted to point out that tax basis and capital account are not the same thing
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Capital account is part of tax basis when it comes to a partner in a partnership
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Capital account is basically everything before you consider liabilities, like non-recourse and recourse liabilities
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And then once you add on those liabilities, that gives the total tax basis
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So when we talk about partnership basis, we are talking about everything
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We're talking about the capital account and the liabilities. But if you hear capital account, you're not considering the liabilities yet
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I just wanted to make sure that you know that. All right, we've gone through all the questions. To finish out this video, let's do one more part of the Superfast CPA strategy, which is something called pillar topics
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Now, the idea behind pillar topics is as you're going through the questions to learn the material
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you will notice things, you will notice topics and concepts that are obviously important according
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to your review course. You've seen these things like three or four times throughout the questions
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you've done multiple calculations to learn how to do this topic or concept, so you know it's important
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So let's go ahead and look at the pillar topics for this video. All right, and the pillar topics are these
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A partner's basis or outside basis in a partnership is affected by multiple things
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By the way, if you ever hear outside basis, it's talking about the things. that we discussed in this video
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There is inside basis for a partner, but we didn't really cover that. If you ever see outside basis, it's what we discussed in this video
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It increases or decreases based off of the partner's share of ordinary income or loss
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separately stated items, contributions and distributions, tax exempt income and non-deductible expenses
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and last, by the partner's share of liabilities. And again, technically, technically everything before the share of liabilities is the partner's capital account
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and including the liabilities is the whole tax base. If a partner contributes an asset, but the partnership takes on a liability that comes with the asset
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the amount of the liability taken on by the partnership reduces the partner's basis gained from the asset
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All right, those are the pillar topics for this video, and that is the end of this video
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Thank you for watching. Make sure you go check out our free training webinar that we have on superfastcpa.com
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Again, it's one hour, it's free, and it will save you so much time struggling with your process
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Also, if you like to go in through questions to learn the material, make sure you check out our Super Fast CPA app where we have five question mini quizzes
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that you can easily take on your phone all throughout your day. If you like this video, make sure to like it and leave a comment
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I hope this was helpful and I will see you in the next video
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