A partner’s capital account and outside basis are 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.

A partner’s outside basis can generally be computed as the partner’s capital account plus the partner’s share of liabilities.

Some examples of the effect 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 can't 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 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.