Do Distributions Reduce Capital Account? Capital Accounts and Basis in Partnership Distributions

Dividends reduce retained earnings.
Distributions decrease capital account and outside basis.
If the partnership has profits, the partner’s share of profits increases his capital account.
Draws allow sole proprietors to take money from the business.
Dividends come from company profits to shareholders.
Capital gains come from the sale of company assets.
Return of capital is from reserve capital.
Companies return money to shareholders by distributions.
Liquidating distributions terminate a partner’s entire partnership interest.
Current distributions reduce capital accounts and outside basis but don’t terminate the interest.

Effect of Distributions on Partner’s Basis and Capital Account

When partnerships liquidate, assets are sold and cash is first applied to creditors.
A partner’s basis is decreased by distributions the partner receives from the partnership.
Basis can never go below zero.
So the distribution that would lower your basis below zero requires you to recognize gain.
A member’s share of any qualified nonrecourse financing is determined based on that member’s share of LLC liabilities incurred in connection with such financing.

Your at-risk amount ("ARA") is calculated starting with your adjusted cost base ("ACB") and adding in the income allocated in the year it arises.
Maintaining the basis in a partnership is essential for partners who wish to take future losses or deductions from the partnership.
The sum of the bases of the property a partner receives in a liquidating distribution must equal the partner’s pre-distribution outside basis, reduced by any money distributed.
Whether earnings are retained in a partnership or distributed to partners has no effect on the taxation of those earnings since partners have to pay tax on the earnings whether they are distributed or not.
Generally, there are no tax consequences of a current property distribution.
Recourse liabilities are those that any partner bears the economic risk of loss concerning the liability.
Distributions in excess of earnings and profits are nontaxable to the extent of shareholder’s basis.
Excess over the basis is a capital gain.
Distributions from corporate earnings and profits are treated as a dividend distribution, taxed as ordinary income.
Partners merely reduce their basis by the amount of the distribution.
If a cash distribution exceeds a partner’s basis, then the excess is taxed to the partner as a gain, which often is a capital gain.