Inside basis is what the partnership's assets are worth on its books. Outside basis is what each partner paid for their stake. Partner A contributes $20,000 cash, Partner B contributes $10,000 equipment. Outside basis determines whether you can deduct partnership losses or have to suspend them.
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So this week I wanted to quickly go over inside and outside basis. Now, these are terms that you're only going to hear about when you're talking about partnership taxation. So what are they? Inside basis is the adjusted basis of the assets a partnership has. So if a partner— if partnership has $50,000 of assets, the adjusted basis is $50,000. The inside basis for that partnership is $50,000. Now, outside basis is the adjusted basis of the partnership interest for a partner, right? So let's suppose you have Partner A, they contribute $20,000 cash to a partnership. You have another party that contributes equipment with an adjusted basis of $10,000. Partner A has an outside basis of $20,000. Partner B has an outside basis of $10,000. The inside basis is the combination of those 2 things. So the inside basis is $30,000. Now, The reason this is such a big deal and why it's important to understand is because outside basis is the first echelon of determining whether or not a loss from a partnership is something that you can use or has to be suspended and carried forward. We're going to get into the next step, which would be at-risk limitations. That'll be next week. But outside basis is important in that calculation, and it's something I wanted to talk about today. If you have any questions, hit me up. Talk soon.
