| Course | AC507 Business Taxation and Strategies |
|---|---|
| Unit | Unit 3 |
| Paper type | Partnership basis problem |
| Length | About 620 words, 5 pages double-spaced |
| Format | APA 7 student paper |
| School | Purdue University Global |
| Program | MS in Accounting |
| Updated | October 2026 |
Free sample paper for AC507 Unit 3
From $30,000 to Zero With $8,000 Waiting: A Unit 3 Partnership Basis Problem for a Climbing Gym Member
[Student Name]
Purdue University Global
AC507: Business Taxation and Strategies
Unit 3 Partnership Basis Problem
[Instructor Name]
[Date]
The climbing gym, its member and every figure are composite; the regulations, statute and publication cited are real; this is coursework analysis, not tax advice.
Facts
Lauren holds a 40 percent interest in the gym. Her outside basis on January 1 is $30,000, of which $20,000 is her share of partnership liabilities. During the year:
1. In March she contributes $10,000 in cash.
2. The gym has a $160,000 ordinary loss; her share is $64,000.
3. The gym sells old equipment at a $15,000 long-term capital gain; her share is $6,000.
4. The gym earns $5,000 of tax-exempt municipal bond interest; her share is $2,000.
5. She receives an $8,000 cash distribution in November.
6. Partnership liabilities rise from $50,000 to $90,000, so her 40 percent share rises from $20,000 to $36,000.
The Ordering Rule
A partner's basis is increased by contributions and by her share of income, including tax-exempt income, and decreased by distributions and by her share of losses and nondeductible expenses (Basis of partner's interest, 26 U.S.C. § 705, 2018). A partner's share of losses is deductible only to the extent of her basis at the end of the year, after the year's increases and distributions are taken into account (Treas. Reg. § 1.704-1, 2024). When her slice of the gym's debt grows, the code counts the growth as if she had put in cash; when it shrinks, as if cash came out to her.
Block 1: Increases
Opening basis of $30,000, plus the $10,000 contribution, plus $6,000 of capital gain, plus $2,000 of tax-exempt interest, plus the $16,000 increase in her share of liabilities, gives $64,000.
Block 2: Distributions
Less the $8,000 cash distribution, leaving $56,000. Because the distribution does not exceed her basis, she recognizes no gain on it.
Block 3: Losses
Her share of the ordinary loss is $64,000, but only $56,000 of basis remains. She deducts $56,000, and her basis falls to zero. The remaining $8,000 is suspended and carries forward indefinitely, deductible in any later year in which she has basis to absorb it.
Applying the distribution before the loss is what limits her deduction: had the loss come first, she would have deducted $64,000 and then received an $8,000 distribution in excess of zero basis, which would have been taxable gain, so the rule converts a gain into a deferred loss.
Carryforward Note
The suspended $8,000 can be used when her basis increases, for example if she contributes more cash, the gym earns income, or its liabilities grow. It is personal to Lauren and does not transfer if she sells her interest. Even after basis, the deduction must also pass the at-risk and passive activity limits; Lauren manages the gym's youth programs and works more than 500 hours a year there, so her loss is nonpassive (Internal Revenue Service, 2024).
Why the Order Is Fair
The ordering rule can look like a technicality, but it follows from what basis measures: the after-tax investment a partner has in the business. Distributions return part of that investment, so they are applied before losses, which can only be deducted against investment that remains. If the gym had distributed nothing, Lauren would have had $64,000 of basis and deducted the whole loss. The $8,000 she took out in November is, in effect, the reason $8,000 of loss must wait.
Closing Basis
Closing basis is zero. Her $36,000 share of liabilities is included in that figure; without the liability increase, more of the loss would have been suspended.
References
Basis of partner's interest, 26 U.S.C. § 705 (2018).
Internal Revenue Service. (2024). Partnerships (Publication 541). U.S. Department of the Treasury.
Treas. Reg. § 1.704-1 (2024).
What the AC507 Unit 3 assignment asks for
The third AC507 unit asks you to compute a partner's outside basis and the deductible loss for a year. Set out the facts: opening basis and its debt component, contributions, each separately stated item, distributions and the change in liabilities. Explain the ordering rule with its sources, then post the schedule in three blocks: increases, including tax-exempt income and increases in the partner's share of liabilities; distributions; and losses, limited to remaining basis. Show any suspended loss and explain when it can be used. Note the other limits a loss must pass after basis, such as at-risk and passive rules, and how they apply to this partner. Explain why the order matters by showing what would happen if it were reversed. Reference the basis statute, the regulation and IRS guidance in APA 7.
How the AC 507 Unit 3 example is put together
The sample lists Lauren's six items, from the March contribution to the liability increase from $50,000 to $90,000. The ordering section cites section 705 and the regulations and explains liability shifts as deemed contributions and distributions. Block one totals increases to $64,000; block two subtracts the $8,000 distribution to $56,000 with no gain; block three allows $56,000 of the $64,000 loss. The highlighted sentence explains how reversing the order would turn the distribution into taxable gain. A carryforward note covers future basis and confirms the loss is nonpassive. A section explains why the ordering rule is fair, and the closing notes how the debt increase supported the deduction.
Reading the AC507 Unit 3 grading rubric
Basis problems in AC507 earn points for correct items and correct order. Graders check that tax-exempt income and liability increases are added, that distributions are applied before losses and that the loss allowed equals remaining basis. The rubric rewards explaining the consequence of the order and identifying the suspended loss with its carryforward rule. Mentioning the at-risk and passive gates, applied to the partner's facts, shows completeness. Schedules that subtract losses before distributions, omit the liability change or treat tax-exempt income as excluded from basis lose substantial credit. A clear three-block layout helps graders follow the work, and the governing statute and regulation should appear in APA 7 references.
AC507 Unit 3 help from the desk
The most common Unit 3 errors are applying losses before distributions and forgetting the change in the partner's share of liabilities. Tax-exempt income is left out because it is not taxable, though it still increases basis. Students compute a negative basis instead of stopping at zero and suspending the excess. The suspended loss is mentioned but not explained. Capital account and outside basis are confused. At-risk and passive limits are ignored entirely. If your section's partner has property distributions or a sale of the interest, a writer can extend the schedule to those events with your figures.
Get an AC507 Unit 3 example written to your instructions
The Unit 3 facts, the member whose basis is tracked, her opening balance and any debt figures, with the grading rubric, give the schedule all it needs. It is built in regulatory order with a citation on each line, suspended amounts carried forward, and it comes back within 24-48h. There is no fee on a first custom sample. The paper above is an original model document written by our desk, not a submitted student paper and not an official Purdue University Global document.
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AC507 Unit 3 questions, answered
Why does a bigger partnership loan raise one member's basis?
Section 752(a) treats an increase in a partner's share of partnership liabilities as a contribution of money, and Section 722 adds contributed money to basis. The logic is that she will eventually bear or repay her share, so the loan is part of her investment. A decrease works the other way, as a deemed distribution, which is why refinancing or paying down debt can trigger gain.
What happens to the suspended loss next year?
It carries forward and is allowed at the end of a later year to the extent Lauren's basis then permits. A new contribution, a share of income or a further rise in debt would each create room. A two-line note in the example shows that an $8,000 share of next year's profit would free the whole suspended amount, since prompts often extend the problem by one year.
Is the capital account the same thing as basis?
No, and the example keeps them apart. The capital account reported on the K-1 excludes liability shares, while outside basis includes them. Lauren's capital account can be negative when her basis is zero or positive, which confuses many first attempts. Some rubrics ask for both figures; when yours does, the example adds a reconciling line that moves from one to the other through her debt share.
Where can I find a free AC507 Unit 3 sample paper?
This page holds a full AC507 Unit 3 partnership basis problem for a 40 percent member of a composite climbing gym LLC, with a three-block basis schedule, a suspended loss and APA 7 references.
Why is the distribution subtracted before the loss?
The regulations apply a partner's distributions before her losses when testing basis at year end. Reversing the order would let the loss use basis that the distribution then exceeds, creating taxable gain instead of a deferred loss.