Partner Capital Account vs. Outside Basis

Although the concepts are similar, a partner’s capital account and outside basis are generally not the same. The partner’s capital account measures the partner’s equity investment in the partnership. The outside basis measures the adjusted basis of the partner’s partnership interest.

One of the key differences between capital accounts and outside basis is the effect of partnership liabilities. Partnership liabilities may increase or decrease the partner’s outside basis, but they have no effect on the partner’s capital account. Because of this fact, a partner’s outside basis can generally be computed as the partner’s capital account plus the partner’s share of liabilities.

The information below highlights the effect of several items on the partner’s capital account and outside basis:

               Contributions to partnership – increases capital account and outside basis

               Distributions – decreases capital account and outside basis

               Distributive share of income and loss – increases/decreases capital account and outside basis

               Partnership liabilities – does not affect capital account, increases/decreases outside basis

A partner’s capital account cannot begin with a negative balance. However, a partner can have a negative capital account after accounting for the partner’s distributive share of losses and/or distributions.

A partner’s outside basis should never have a negative balance. A partner is generally required to carry forward any losses that have been disallowed because they are in excess of the partner’s outside basis. If a partner receives a distribution that is in excess of their outside basis, the partner may have to recognize a gain.