Final answer:
The incorrect adjustment to a partner's basis in the partnership interest is 'Decreased by the amount of guaranteed payments shown on the partner's Schedule K-1', as these payments affect partnership income, not the partner's basis.
Step-by-step explanation:
The question relates to the adjustments to a partner's basis in a partnership interest. The purpose of these adjustments is to ensure that the partner's capital account and basis in the partnership reflect the true economic cost of the interest. In particular:
- Decreased by the amount of guaranteed payments shown on the partner's Schedule K-1
- Increased by contributions the partner made to the partnership
- Decreased by any decrease in the partner's share of partnership liabilities
- Increased by the partner's share of tax-exempt income
- Increased by the partner's share of separately stated income items
The incorrect adjustment indicated in the question is the first option: 'Decreased by the amount of guaranteed payments shown on the partner's Schedule K-1'. Guaranteed payments to a partner are typically treated as a reduction of the partnership's income, not as an adjustment to the partner's capital account or basis. Therefore, the partner's basis is not reduced by these guaranteed payments but rather by the partner's distributive share of the partnership's losses, if any.