CPA Exam — REG (Regulation)Federal Taxation of EntitiesMedium
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 debt of $100,000. How much of this nonrecourse debt increases Alex's basis in his partnership interest?
- A$0
- B$25,000
- C$50,000
- D$100,000
Show answer & explanationAnswer & explanation
Correct answer: C. $50,000
Nonrecourse debt is allocated among partners according to their share of partnership profits. Since Alex has a 50% interest in profits, $100,000 * 50% = $50,000 of the nonrecourse debt increases Alex's basis.
Why the other options are wrong
- A. Incorrect; nonrecourse debt generally increases partner basis.
- B. Incorrect; this would be for a 25% profit interest.
- D. Incorrect; this is the total debt, not Alex's share.
Partnership Nonrecourse Debt Allocation
Nonrecourse debt of a partnership is allocated among partners based on their share of partnership profits, increasing their basis.
- Nonrecourse debt is debt for which no partner has personal liability.
- Allocation rules are complex and involve three tiers for specific situations.
- Generally, the profit-sharing ratio is the primary method for general allocations.
Memory trick: Recourse Responsibility, Nonrecourse Niche.