CPA Exam — REG (Regulation)Federal Taxation of EntitiesEasy
A client, a partnership, has two partners, Alex and Ben, who each have a 50% interest in profits and losses. The partnership has a nonrecourse liability of $100,000. How much of this liability is allocated to Alex for purposes of basis calculation?
- A$50,000
- B$100,000
- C$25,000
- D$0
Show answer & explanationAnswer & explanation
Correct answer: A. $50,000
Nonrecourse liabilities are generally allocated among partners according to their share of partnership profits. Since Alex has a 50% profit interest, he is allocated 50% of the nonrecourse liability.
Why the other options are wrong
- B. This is incorrect. This would imply Alex is allocated 100% of the liability.
- C. This is incorrect. This would be a 25% allocation.
- D. This is incorrect. Nonrecourse liabilities are allocated to partners.
Partnership Nonrecourse Liability Allocation
Nonrecourse liabilities are generally allocated among partners in proportion to their share of partnership profits.
- Increases a partner's basis.
- Allocated based on profit-sharing ratios.
- No partner bears economic risk of loss for nonrecourse debt.
Memory trick: Nonrecourse debt, profit shares are the key, no one truly 'owns' it, you see.