Unlocking Basis Adjustments with §§754 and 743

Getting basis adjustments right can mean the difference between closing a business or walking away. With a timely §754 election, you can unlock extra deductions that produce real after-tax dollars for your client. 

You’ll strengthen cash flow in real estate, oil and gas, and other industries where every dollar counts; all without changing anyone else’s capital.

Below, you’ll find a few of the top questions from a recent webinar on the topic and their corresponding answers. If you choose to attend the on-demand version of this webinar, you can access the full recording and the entire list of Q&As.   

Q: Can guaranteed payments on a partnership Schedule K-1 go on Line 6 of Schedule K-1 for the personal return?
A: No. Guaranteed payments are reported to the partner on Schedule K-1 (Form 1065), Box 4. The partner should then report this income on Schedule E (Form 1040), Part II.

Q: Are guaranteed payments subject to self-employment tax?
A: Yes, guaranteed payments to partners for services or capital are generally treated as self-employment income and are subject to self-employment tax, reported on Schedule SE, Self-Employment Tax.

Q: Do guaranteed payments increase basis?
A: No. Guaranteed payments received by a partner from a partnership do not increase that partner’s basis. Only the partner’s distributive share of income and additional capital contribution increases basis.

Q: Where do I enter §754 depreciation on the tax return?
A: §754 is an election. Now, depreciation resulting from the §754 election is reported to the partner on Schedule K-1 and the partner reports that on Schedule E, Line 28 with notation §743(b) adjustment from Schedule K-1.

To learn more about §§754 & 743, you can watch our on-demand webinar. NATP members can attend for free, depending on membership level! If you’re not an NATP member and want to learn more, join our completely free 30-day trial.