Question

jabari becomes a 40% interest partner in an accounting partnership on january 1, 2021. during the year ended december 31, 2021, the business earns income of $200,000 for accounting purposes. in arriving at this income figure, the bookkeeper deducted meals and entertainment costs of $20,000, and a charitable donation of $5,000. jabari withdraws $50,000 from the partnership during 2021. as of january 1, 2022, his adjusted cost base of his partnership interest will have increased by:

Answer 1

The adjusted cost base of Jabari's partnership interest would have increased by his share of the partnership's income minus any withdrawals he made. Without consideration of various deductions, his 40% share of $200,000 income, less his $50,000 withdrawal, would increase his cost base by $30,000.

Step-by-step explanation:

To understand how Jabari's adjusted cost base of his partnership interest will have increased by the end of the year, we need to do some calculations. The business earned $200,000 for accounting purposes, out of which certain costs were deducted that may not be deductible for tax purposes. Jabari has a 40% interest in the accounting partnership, so he is allocated 40% of the partnership's income and expenses for the year.

However, the deductions mentioned such as meals and entertainment costs ($20,000) and charitable donations ($5,000) may not be fully deductible for tax purposes. If tax rules do not allow these expenses to be deducted, they should be added back to the partnership's income to calculate Jabari's share of the income for tax purposes.

Ignoring those deductible items, Jabari's 40% share of the income would be $80,000 ($200,000 × 40%). Since Jabari withdrew $50,000 from the partnership, the remaining amount, $30,000 ($80,000 - $50,000), would serve to increase the adjusted cost base of his partnership interest as of January 1, 2022.