Greg and Hank are equal partners. Greg's outside basis is $10,000. Hank's outside basis is $5,000.

(a) During the current year, the partnership has gross income of $40,000 and an ordinary $60,000 loss. What are Greg and Hank's basis at the end of the year?

(b) In the second year, the partnership has gross income of $50,000 and a $10,000 expense. What are Greg and Hank's basis at the end of the year?

(c) In the third year, the partnership has gross income of $10,000, an ordinary loss of $70,000 and a short-term capital loss of $40,000. What are Greg and Hank's basis at the end of the year?

Answer:

For Year 1, the outside basis for both Greg and Hank is $0.

For Year 2, the outside basis for Greg is $20,000 and for Hank is $20,000 too.

For Year 3, again the outside basis for Greg and Hank both would be $0.

Step-by-step explanation

The basis of partner is increased by:

• Further contributions made to the partnership (considering other ways of acquisition)
• Share of partners in the income of partnership, whether taxable or exempt.
• Share of partners in the liability of partnership.

The basis of partner is decreased by:

• Money or property distribution by the partnership
• Share of partners in the partnership losses and the expenditure which are either non deductible or non capitalized.
• Decline in the share of partners in the  partnership liabilities.

Calculation of outside basis can be shown as below:

Notes:

(1) Partner's outside basis can not be less than 0.

(2) Short-term losses which are capital in nature shall not be deducted from the outside basis as the same is a capitalized loss.

Reference:

https://corporatefinanceinstitute.com/resources/knowledge/accounting/754-inside-basis-vs-outside-basis/ 

PFA