CPA Exam — REG (Regulation)Federal Taxation of EntitiesMedium
A client, a partnership, incurred $60,000 in ordinary business losses for the current year. Partner A, a 40% partner, has an adjusted basis in their partnership interest of $20,000 before considering the loss. Partner A is not at risk for any amount beyond their basis. How much of Partner A's share of the loss can be deducted currently?
- A$60,000
- B$0
- C$24,000
- D$20,000
Show answer & explanationAnswer & explanation
Correct answer: D. $20,000
Partner A's share of the loss is $60,000 * 40% = $24,000. However, the deduction is limited to their adjusted basis of $20,000. The remaining $4,000 loss is suspended.
Why the other options are wrong
- A. This is the total partnership loss, not Partner A's share, and ignores basis limitations.
- B. This implies no loss can be deducted, which is incorrect as basis exists.
- C. This is Partner A's full share of the loss but does not consider the basis limitation.
Partnership Basis Loss Limitation
A partner's deductible share of partnership losses is limited to their adjusted basis in their partnership interest at the end of the partnership year.
- Basis includes capital contributions and share of partnership debt.
- Losses exceeding basis are suspended and carried forward indefinitely.
- Suspended losses can be deducted in future years if basis increases.
Memory trick: Basis Blocks Big Bad Losses.