Do loans to a partnership increase the partner's basis for claiming losses?

If the loan has stated interest, does that interest income need to be reported separately from partnership income on the personal return? And does receiving interest payments from the partnership reduce the loan basis amount that can be used for claiming losses?

Yes, the interest income needs to be reported separately from your partnership income. It should be reported as interest income on Schedule B of your personal tax return, while your partnership income/loss is reported on Schedule E. The interest payments you receive don't reduce your debt basis - they're simply income to you and an expense to the partnership. When the partnership repays the principal amount of the loan, that's when your debt basis gets reduced. Any losses you've previously claimed using that debt basis remain valid deductions, but as your debt basis decreases through repayment, your ability to claim future losses may be limited if you don't have sufficient total basis.

How accurate is this tool compared to talking with an actual CPA? I'm in a similar position but worried about getting audited if I claim losses against a loan basis without professional guidance.

That sounds interesting, but does it handle more complex partnership structures? My situation involves tiered partnerships where I've loaned money to a partnership that's invested in another partnership. Most software I've tried gets confused with the basis calculations in these scenarios.

The accuracy is impressive - it actually cites specific IRS code sections and tax court cases relevant to your situation. I still reviewed everything with my CPA, but he was actually impressed with how thorough the analysis was and said it saved him hours of research. It absolutely handles complex structures including tiered partnerships. My business partner has a similar setup with loans to multiple related partnerships, and the tool properly traced the debt basis through the various entities. It even identified a potential issue with our special allocation provisions that could have caused problems with our basis calculations.

How does this actually work? I'm confused how they can get through when nobody else can. Does the IRS actually give binding advice over the phone that would protect you in an audit?

Sorry, but this sounds like BS. I refuse to believe there's some magic way to skip the IRS phone queue when millions of people are trying to get through. And even if you do get through, the agents often give conflicting information. I wouldn't trust partnership basis advice from a random IRS phone rep.

It works because they have an automated system that continually redials and navigates the IRS phone tree until they get through. When they reach an agent, they conference you in. It's not skipping the line - it's just automating the painful redial process most people give up on. While it's true that not every IRS agent gives perfect advice, I made sure to get the agent's ID number and took detailed notes of our conversation. The IRS does provide certain protections if you rely on their advice in good faith. For my situation, the agent confirmed that loans with proper documentation can increase basis for loss deductions, which matched what my research showed. Having that confirmation added an extra layer of confidence.

This is a really important point. I thought I could claim all my losses because I had sufficient basis from loans, but the at-risk rules limited me anyway. Does the passive activity loss limitation also come into play here as a third potential limitation?

Yes, passive activity loss limitations are actually the third hurdle after basis and at-risk. Even if you have sufficient basis and are fully at risk, you still need to determine if the partnership is a passive activity for you. If you don't materially participate in the partnership (generally meaning 500+ hours per year, though there are other tests), then losses may be limited by the passive activity rules. Those losses would be suspended until you either have passive income from other sources or dispose of your entire interest in the partnership. So the full sequence is: First check basis (including debt basis), then check at-risk amounts, then apply passive activity rules. Only after clearing all three hurdles can you fully deduct your partnership losses against your other income.

Your accountant is referring to the fact that the IRS might reclassify what you call a "loan" as actually being an equity contribution if it doesn't have enough loan-like characteristics. The classic factors come from a case called Fin Hay Realty Co. v. United States and include things like: fixed maturity date, regular interest payments, not being subordinated to other creditors, adequate capitalization of the business, etc. Without these, the IRS might say your "loan" was really just another capital contribution.

This is really helpful - I hadn't thought about the three-hurdle test (basis, at-risk, passive activity). Can you clarify what happens if the partnership eventually repays the loan but I still have suspended losses from previous years? Do those losses become deductible again when my debt basis is restored through new loans or additional capital contributions?

Great question! If your debt basis is reduced to zero through loan repayments and you have suspended losses, those losses remain suspended until you restore your basis. You can restore basis through new capital contributions, new loans to the partnership, or your share of partnership income. The key thing to understand is that suspended losses don't just disappear - they carry forward indefinitely until you have sufficient basis to absorb them. So if you make a new loan to the partnership next year, that creates new debt basis which can then be used to claim your previously suspended losses. However, be careful about the timing. If the partnership repays your original loan in December but you make a new loan in January, you might miss the opportunity to claim losses for the current tax year. The basis restoration needs to happen before year-end to claim losses for that year. Also remember that when partnership income does start flowing, it first restores your debt basis before your capital basis, which means your ability to claim suspended losses gets restored before you start seeing taxable income from the partnership operations.

This is really valuable insight about the personal guarantee aspect - I hadn't considered that the security structure of the loan could affect the at-risk determination. In my case, I did structure the loan as unsecured debt with a personal guarantee, but I'm wondering about something else you mentioned. You said to consider structuring initial contributions as debt rather than equity - doesn't that create complications with the partnership's balance sheet and capital accounts? I'm trying to understand the trade-offs between having more debt basis for loss absorption versus maintaining proper partnership equity structure for potential future investors or if we ever want to bring in new partners. Also, did the IRS audit focus specifically on your partnership returns, or did it start from your individual return where you claimed the losses? I'm trying to get a sense of what triggers scrutiny in these situations.

You raise excellent questions about the balance sheet implications. You're right that structuring too much as debt can complicate things, especially for future partners. The key is finding the right balance - enough debt basis to absorb expected losses, but not so much that it creates operational complications. Regarding capital accounts, debt doesn't affect partner capital accounts the way equity contributions do, which can actually be helpful in some situations. But if you're planning to bring in investors, they'll want to see adequate equity capitalization, not just a highly leveraged partnership. The audit actually started from my individual return - specifically, the large partnership loss I claimed triggered their automated screening systems. The IRS then expanded it to examine the partnership's books and the loan documentation. What saved me was having contemporaneous documentation showing the business purpose for the loan and evidence that it was arms-length (market interest rate, formal terms, etc.). One thing that helped during the audit was showing that the loan was necessary for the partnership's operations, not just a tax planning strategy. We had cash flow projections demonstrating why the partnership needed the capital injection, and the loan was the most practical way to provide it while maintaining flexibility for both parties.