CPA Exam — REG (Regulation)Federal Taxation of EntitiesHard
A client, a partnership, incurred $50,000 in ordinary business losses for the current year. Partner C, a general partner, has an adjusted basis in their partnership interest of $30,000 and an at-risk amount of $25,000. How much of the ordinary loss can Partner C deduct in the current year, assuming no other limitations apply?
- A$50,000
- B$30,000
- C$25,000
- D$0
Show answer & explanationAnswer & explanation
Correct answer: C. $25,000
Partnership losses are subject to three main limitations: basis, at-risk, and passive activity loss rules. First, losses are limited to basis ($30,000). Then, they are limited to the at-risk amount ($25,000). Since the at-risk amount is lower than the basis, Partner C can only deduct $25,000 of the loss in the current year. The remaining loss is suspended.
Why the other options are wrong
- A. This is the full loss, but it is limited by both basis and at-risk rules.
- B. This is the basis limit, but the at-risk limit is lower, so this amount cannot be deducted.
- D. Incorrect; Partner C can deduct a portion of the loss.
Partnership Loss Limitations
Partnership losses deductible by a partner are limited by the partner's tax basis in their interest, their at-risk amount, and passive activity loss rules. These limitations apply sequentially.
- Basis limitation first.
- At-risk limitation second.
- Passive activity loss rules third.
- Suspended losses carry forward indefinitely.
Memory trick: Basis, At-Risk, Passive: The BAP for Partner Losses!