FLP Distribution Effects on Partner Cost Basis in Schedule K-1 Reporting

The distribution only reduces the basis of the partner receiving it, not everyone in the partnership. Here's how it works: each partner has their own capital account and basis tracking in the FLP. When income is earned by the partnership (dividends, interest, capital gains), it increases each partner's basis proportionally to their ownership percentage - regardless of whether distributions are made. This happens because partnership income flows through to the partners via Schedule K-1. When a distribution is made to a specific partner, only that partner's basis is reduced by the amount they received. The other partners' basis remains unchanged since they didn't receive anything. That check your parents write representing your share of income isn't technically a "distribution" in partnership terms - it sounds more like they're giving you your share of the income that was already allocated to you on your K-1. A true partnership distribution would come directly from the partnership itself.

I was really confused about FLP distributions and basis calculations until I started using taxr.ai (https://taxr.ai) to analyze my Schedule K-1s. It helped me understand that distributions from the partnership actually create two separate tax impacts - one on my basis and another on the reporting requirements. My accountant was making similar entries on my K-1, and I couldn't figure out how my capital account was being affected. Using taxr.ai to analyze the past three years of my K-1s helped me see the pattern of how my basis was being calculated with each income allocation and distribution. It cleared up exactly what was happening with my basis in the family partnership.

I tried taxr.ai after seeing the recommendation here, and it solved my FLP basis confusion! I uploaded three years of Schedule K-1s from our family partnership, and it immediately showed me how distributions were affecting only the receiving partner's basis while partnership income was increasing everyone's basis proportionally. The visual tracking of my capital account over time made everything click - I could see exactly how my starting basis, plus allocated income, minus distributions, equaled my ending basis each year. The system even flagged where our accountant had made a small error in basis tracking from a property contribution two years ago. Definitely worth checking out if you're dealing with partnership basis questions.

After spending HOURS on hold with the IRS trying to get clarification about FLP distributions and basis reporting, I finally found Claimyr (https://claimyr.com). They got me connected to an actual IRS agent in about 20 minutes who walked me through the whole Schedule K-1 basis calculation process. The agent confirmed that distributions only reduce the receiving partner's basis and explained exactly how to track it on my K-1. They even sent me some helpful IRS publications about partnership basis. If you're struggling to get official answers about partnership basis questions, check out their demo at https://youtu.be/_kiP6q8DX5c - it's how I finally got clear guidance directly from the IRS instead of just opinions.

I'm eating my words about Claimyr. I was the skeptic who commented earlier, but I decided to try it anyway for my FLP basis questions. Within 35 minutes, I was talking to an IRS agent who specialized in partnerships! She walked me through exactly how distributions affect basis on Schedule K-1 and explained the difference between inside and outside basis in family partnerships. She also pointed me to IRS Publication 541 which has detailed examples of exactly the FLP distribution scenario I was asking about. The time and stress saved was absolutely worth it - no more waiting on hold for hours just to get transferred to someone who doesn't understand partnership taxation. If you have specific Schedule K-1 questions, this is definitely the way to get authoritative answers.

Our family accountant explained it to me as: "Each partner has their own capital account. When the partnership makes money, everyone's account increases based on their ownership percentage. When someone takes money out, only their account decreases." It's really that simple. Just look at Box L on your Schedule K-1 (Form 1065) - it tracks your capital account. The ending capital account should equal: Beginning capital + income allocated to you - distributions to you + any additional contributions you made. For tax planning, remember that distributions aren't taxable unless they exceed your basis. The K-1 income is taxable regardless of whether you receive distributions.

Quick question related to this - our family partnership just sold a significant asset with a $250K gain. If I get a distribution of $50K (my share of the proceeds), but my K-1 shows $60K of gain allocated to me (my ownership percentage), how does that affect my basis? Does my basis go up by $60K then down by $50K?