Question

Kari is a limited partner in Lizard Partnership. This year, Kari's share of partnership ordinary income is $20,000, and she received a cash distribution of $30,000. Kari's tax basis in her partnership interest at the beginning of the year was $50,000. Her marginal tax rate is 22 percent. Kari qualifies for the QBI deduction, without regard to the wage or taxable income limitations.
a. Calculate the tax cost of Kari's partnership earnings this year Tax cost
b. Compute Kari's after-tax cash flow from her partnership activity this year After-tax cash flow
c. Compute Kari's tax basis in her partnership interest at the ending of the year. Assume no change in her share of partnership during the year.

Answer 1

Answer: a. $3520

b. $26480

c. $40000

Explanation:

a. Calculate the tax cost of Kari's partnership earnings this year Tax cost

Ordinary Income = $20000

Less: 199A deduction = 20% × $20000 = $4000

Ordinary Income share = $16000

The tax cost of Kari's partnership earnings this year Tax cost will be:

= 22% × $16000

= 0.22 × $16000

= $3520

b. Compute Kari's after-tax cash flow from her partnership activity this year After-tax cash flow

This will be:

= Cash distribution - Tax cost

= $30000 - $3520

= $26480

c. Compute Kari's tax basis in her partnership interest at the ending of the year. Assume no change in her share of partnership during the year.

Basis at start of year = $50000

Add: Ordinary income = $20000

Adjusted basis = $50000 + $20000 = $70000

Less: Cash distribution = $30000

End of year basis = $40000