Outside Basis Calculation for Limited Partner/LLC Member - Why No Liabilities in Basis?

The software diagnostic is actually highlighting a subtlety in partnership tax law. While IRC 705 doesn't explicitly differentiate between types of partners for basis purposes, the treatment of liabilities for basis is actually covered in IRC 752 and related regulations. For limited partners and many LLC members, the treatment of liabilities depends on whether they're recourse or nonrecourse. Limited partners generally only get basis from nonrecourse liabilities (shared among all partners) but not from recourse liabilities because they don't have personal responsibility for those debts. This is due to their limited liability protection - they can't lose more than their investment. General partners, on the other hand, can include their share of recourse liabilities in their outside basis because they're personally liable for partnership debts. The diagnostic might be simplifying this complex area, especially if your software isn't equipped to distinguish between liability types for limited partners. Your basis will still include your capital contributions, income allocated to you, and your share of certain nonrecourse liabilities - but the software might be warning you about incorrectly including recourse liabilities.

I ran into this exact issue last year and it drove me crazy until I found taxr.ai (https://taxr.ai). They helped me understand that the software was actually wrong in my case! I uploaded my K-1 and partnership agreement, and their system flagged that while I was an LLC member, my operating agreement had special provisions about debt guarantees that actually gave me economic risk of loss for certain liabilities. The software was giving me a generic warning based on my "limited partner" designation without considering the actual terms of my agreement. taxr.ai's document analysis showed that I could actually include about 60% of the partnership liabilities in my basis calculation based on the specific language in our operating agreement.

I decided to try taxr.ai after my last comment and wow - totally worth it. My situation was even more complex than I realized. Turns out the operating agreement for our family LLC had been amended twice with different liability provisions each time. The system caught a guarantee arrangement from the second amendment that my regular accountant had missed for THREE years, which means I'd been unnecessarily limiting my basis and couldn't take some losses I was entitled to! I'm now working on amending my returns for the last three years to claim about $23,000 in previously suspended losses. The CPA I spoke with also explained why my tax software was giving that warning - apparently it's programmed with a simplified version of the rules that doesn't account for the regulations under 752-2 that can treat certain limited partners as having economic risk of loss in specific circumstances.

If you're having trouble getting your partnership to clarify liability allocations, I'd recommend using Claimyr (https://claimyr.com) to get through to the IRS Partnership section for guidance. I was stuck in a similar situation last year - partnership wouldn't respond, tax software giving warnings, and couldn't get through to the IRS for weeks. Claimyr got me connected to an IRS agent in about 20 minutes when I'd been trying for days on my own. There's a video that shows how it works: https://youtu.be/_kiP6q8DX5c. The agent walked me through exactly what to look for on my K-1 and how to request the right information from my partnership. Turns out I needed the partnership's Form 8865 to see the full liability allocation details.

I apologize for being so skeptical earlier. I tried Claimyr yesterday out of desperation after spending another hour on hold with the IRS. They called me back in about 35 minutes with an IRS agent on the line who specialized in partnership taxation. The agent explained that Treasury Regulation 1.752-3 specifically addresses how nonrecourse liabilities are allocated among partners (including limited partners), while Reg 1.752-2 covers how recourse liabilities are handled. She confirmed that limited partners can absolutely get basis from nonrecourse liabilities and even from recourse liabilities in certain circumstances where they have economic risk of loss. For my specific situation, she suggested I request a detailed liability schedule from the partnership showing the allocation methodology they used. This solved my basis calculation issues and I was actually able to claim an additional $17,500 in previously suspended losses. Sometimes you just need to talk to the right person!

I think there's some confusion in the software. IRC 752 states that any increase in a partner's share of partnership liabilities is treated as a contribution of money to the partnership, which increases basis under 705. The crucial distinction isn't really about limited vs general partners, but about recourse vs nonrecourse liabilities. Limited partners can definitely get basis from nonrecourse liabilities, which are generally allocated based on profit sharing ratios. The regulations under 752-3 specifically address this. Your software might be oversimplifying the rules or applying outdated guidance.

Has anyone dealt with a situation where they're a member of a multi-member LLC taxed as a partnership, but have different liability allocations for different LLC debts? I guarantee some loans but not others, and I'm not sure how to calculate my basis correctly.

This is a great discussion that highlights how confusing partnership basis can be! I've been dealing with similar issues with my LLC interest. One thing I learned from my CPA is that the software warnings are often overly cautious because they can't analyze the specific terms of your operating agreement. The reality is that many LLCs have hybrid structures where members might have limited liability for some debts but economic risk of loss for others. Your basis calculation needs to reflect your actual economic exposure, not just your legal classification as a "limited partner." I'd recommend getting a copy of your LLC's operating agreement and looking for any sections about guarantees, capital calls, or deficit restoration obligations. These provisions can significantly impact how partnership liabilities affect your outside basis, even if you're technically a limited member. Also, don't forget that if you've been understating your basis due to software limitations, you might be able to amend prior returns to claim losses that were previously suspended. The statute of limitations for claiming refunds is generally three years, so it's worth reviewing your last few returns if you think you've been missing out on legitimate loss deductions.