CPA Exam — REG (Regulation)Federal Taxation of EntitiesHard
A client, a limited partnership, has a general partner (GP) and a limited partner (LP). The partnership agreement states that all profits and losses are shared 50/50. The GP contributed services only, with no capital contribution. The LP contributed $100,000 cash. If the partnership incurs a $120,000 ordinary loss in its first year of operations, how much of this loss can the LP deduct, assuming sufficient basis and at-risk amounts?
- A$100,000
- B$50,000
- C$60,000
- D$0
Show answer & explanationAnswer & explanation
Correct answer: C. $60,000
Limited partners can generally deduct their share of losses up to their basis in the partnership, which includes their capital contributions and their share of partnership liabilities (for nonrecourse debt). Here, the LP's share of the $120,000 loss is $60,000 (50%). Since the LP's basis is $100,000, and there's no mention of nonrecourse debt or other limitations, the LP can deduct the full $60,000 share of the loss.
Why the other options are wrong
- A. This is the LP's capital contribution, which is the basis, but not the amount of loss allocated.
- B. This would be incorrect if the LP's share was different or limited by a specific rule not applicable here.
- D. This is incorrect; limited partners can deduct losses up to their basis.
Partnership Loss Limitations
Partners can deduct their share of partnership losses only up to certain limitations: basis, at-risk amount, and passive activity rules.
- Basis Limit: Losses cannot exceed partner's adjusted basis.
- At-Risk Limit: Losses cannot exceed partner's at-risk amount.
- Passive Activity Limit: Passive losses can only offset passive income.
Memory trick: Basis First, At-Risk Second, Passive Last: The Loss Deduction Gauntlet!