CPA Exam — REG (Regulation)Federal Taxation of EntitiesEasy
A client, a partnership, has two partners, A and B, who each have a 50% interest in profits and losses. The partnership purchased equipment for $100,000, financed by a nonrecourse loan of $80,000. Partner A's adjusted basis in the partnership interest before considering the loan is $15,000. How much of the nonrecourse debt increases Partner A's basis?
- A$0
- B$40,000
- C$20,000
- D$80,000
Show answer & explanationAnswer & explanation
Correct answer: B. $40,000
Nonrecourse debt is allocated among partners according to their profit-sharing ratios. Since Partner A has a 50% profit interest, 50% of the $80,000 nonrecourse debt, or $40,000, increases Partner A's basis.
Why the other options are wrong
- A. Nonrecourse debt does increase partner basis.
- C. This would be 25% of the debt, which is incorrect for a 50% profit interest.
- D. This would be the entire debt, which is only allocated to a single partner if they had a 100% interest.
Partnership Nonrecourse Debt Basis
A partner's basis in their partnership interest includes their distributive share of partnership liabilities. Nonrecourse debt is generally allocated among partners in proportion to their share of partnership profits.
- Nonrecourse debt increases partner's basis.
- Allocated based on profit-sharing ratios.
- Recourse debt is allocated based on economic risk of loss.
Memory trick: Recourse Risk, Nonrecourse Profits: The Partner Debt Mix!