Clint noticed that the Schedule K-1 he just received from ABC Partnership included a $20,000 ordinary business loss allocation. His tax basis in ABC at the beginning of ABC's most recent tax year was $10,000. Comparing the Schedule K-1 he recently received from ABC with the Schedule K-1 he received from ABC last year, Clint noted that his share of ABC partnership debt changed as follows: recourse debt increased from $0 to $2,000, qualified nonrecourse debt increased from $0 to $3,000, and nonrecourse debt increased from $0 to $3,000. Finally, the Schedule K-1 Clint recently received from ABC reflected a $1,000 cash contribution he made to ABC during the year.Clint is not a material participant in ABC Partnership, and he received $10,000 of passive income from another investment during the

Question

same year he received the loss allocation from ABC. How much of the $20,000 loss from ABC can Clint deduct currently, and how much of the loss is suspended because of the tax basis, at-risk, and passive activity loss limitations?

What will be an ideal response?

Answer 1

The amount of loss Clint can deduct currently depends on his tax basis and at-risk amount before considering the loss. Clint's tax basis at the beginning of the year was $10,000, which should be increased by his $1,000 actual cash contribution and his deemed cash contribution from the increase in his share of partnership debt. Thus, his tax basis before considering the loss is $19,000 ($10,000 + $1,000 + $2,000 + $3,000 + $3,000). Clint's at-risk amount is calculated by reducing his tax basis by the nonrecourse debt included in his tax basis. Therefore, he has an at-risk amount of $16,000 ($19,000 ? $3,000). Because Clint's $20,000 loss exceeds his tax basis by $1,000, $1,000 of loss is suspended by the tax basis limitation. Since his remaining $19,000 loss exceeds his at-risk amount by $3,000, $3,000 of additional loss is suspended because of the at-risk limitation. Only $10,000 of the remaining $16,000 of loss may be deducted currently against the $10,000 of passive income Clint has from the other investment. This leaves $6,000 remaining as a passive activity loss carryforward.