What Is a 1055 Form for a Partner’s Interest in a Partnership?
Unpack Form 1055 to clarify your partnership interest's adjusted tax basis. Critical for precise tax calculations.
There is no specific IRS Form 1055 for reporting a partner’s interest in a partnership. Understanding and tracking a partner’s adjusted basis is fundamental to partnership taxation, with information primarily found in Schedule K-1 (Form 1065) and IRS Publication 541, “Partnerships.”
Purpose and Significance of a Partner’s Adjusted Basis
Tracking a partner’s adjusted basis, or “outside basis,” is an important responsibility for each partner. This represents their investment and is separate from the partnership’s “inside basis” in its assets. The adjusted basis serves several important tax functions, including determining the taxable gain or loss when a partner sells or disposes of their partnership interest.
The adjusted basis also limits the amount of partnership losses a partner can deduct on their personal tax return. A partner cannot claim a share of partnership losses that exceeds their adjusted basis in the partnership at the end of the tax year. Any losses or deductions limited by basis can be carried forward indefinitely and deducted in a future year when sufficient basis is established.
Components Affecting a Partner’s Adjusted Basis
A partner’s adjusted basis changes over time due to various transactions and activities. The initial basis is established by the amount of cash contributed to the partnership, plus the adjusted basis of any property contributed.
Increases to a partner’s adjusted basis include their share of the partnership’s taxable income, tax-exempt income, and any additional contributions of money or property to the partnership. An increase in a partner’s share of partnership liabilities is also treated as a money contribution, increasing their basis.
Conversely, a partner’s adjusted basis is decreased by distributions of money or property received from the partnership, and their share of partnership losses. Nondeductible partnership expenses that are not capital expenditures also reduce basis. A decrease in a partner’s share of partnership liabilities is considered a money distribution, which reduces basis.
Utilizing Adjusted Basis for Tax Reporting
Partners are responsible for maintaining their own records to calculate their adjusted basis, as the partnership is not typically responsible for this tracking. While Schedule K-1 (Form 1065) provides an analysis of the partner’s capital account, this information is based on the partnership’s books and records and may not directly reflect the partner’s tax basis. The instructions for Schedule K-1 often include a worksheet to help partners determine their adjusted basis.
The calculated adjusted basis is important when a partner prepares their individual tax return, such as Form 1040. If a partner sells their interest, the difference between the sale price and the adjusted basis determines the taxable gain or loss, which is typically reported on Schedule D (Capital Gains and Losses). The basis limitation rules, as outlined in Internal Revenue Code Section 704, ensure that losses passed through from the partnership do not exceed the partner’s investment.
The information reported on Schedule K-1 (Form 1065), including a partner’s share of income, losses, deductions, and credits, is directly used to make the annual adjustments to the partner’s basis. This ensures that the tax consequences of partnership activities are properly reflected on the partner’s individual tax return. Tracking adjusted basis is necessary for accurate tax compliance and to correctly apply various tax provisions related to partnership interests.