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The inside basis is the partnership's tax basis in the individual assets.
The outside basis is the tax basis of each individual partner's interest in the partnership.
However, certain types of distributions and any distributions that exceed the partner's basis may result in gains or losses that must be reported for the year in which they occur.
To understand the taxation of partnerships and distributions, it is necessary to know the 2 types of tax bases concerning partnerships.
Capital Gain = Cash Distribution – Partner's Outside Basis Distributions are generally made throughout the year, but they are taken into account on the last day of the partnership's tax year.
To minimize capital gains on distributions that may be greater than a partner's equity, the basis is 1 increased by the amount of income earned during the year, then it is decreased by any distributions: any excess distribution over the partner's basis is taxable as a capital gain.
The primary difference between C corporations and S corporations is that C corporations are taxed twice on earned income: : once at the corporate level when the income is earned, and again at the shareholder level when the income is distributed.
If the corporation distributes property that has depreciated (i.e., property with a built-in loss), Code § 311(b) does not apply. Corporate shareholders may prefer that the distribution be treated as a dividend, allowing the corporation to take advantage of the special dividends-received deduction under Code § 243 (which allows the dividends to only be taxed once at the corporate level).On the other hand, individual shareholders often prefer that the distribution be treated as a redemption, for three reasons: A distribution qualifies as a stock redemption only if it significantly reduces the interest of the shareholder in the corporation.Generally, losses are only recognized in a liquidating distribution.No gain is recognized from a distribution of cash or marketable securities that can easily be converted to cash, unless the distribution is more than the partner's outside basis, in which case, the excess is taxable as a capital gain.