Question

Sue invested $5,000 in the ABC Limited Partnership and received a 10 percent interest in the partnership. The partnership had $20,000 of qualified nonrecourse debt and $20,000 of debt she is not responsible to repay because she is a limited partner. Sue is allocated a 10 percent share of both types of debt resulting in a tax basis of $9,000 and an at risk amount of $7,000. During the year, ABC LP generated a ($90,000) loss. How much of Sue's loss is disallowed due to her tax basis or at-risk amount?

A. Zero; all of her loss is allowed to be deducted.
B. $2,000 disallowed because of her at-risk amount
C. $2,000 disallowed because of her tax basis
D. $4,000 disallowed because of her tax basis.
E. $4,000 disallowed because of her at-risk amount

Answer 1

Sue's share of the partnership loss exceeds her at-risk amount, so her deductible loss is limited to $7,000. The $2,000 excess is disallowed due to her at-risk limitations.

Step-by-step explanation:

Sue invested $5,000 in ABC Limited Partnership and received a 10% interest. She has a tax basis of $9,000 and an at-risk amount of $7,000. ABC Limited Partnership reported a loss of $90,000 for the year, and Sue is allocated 10% of this loss, which amounts to $9,000. However, she can only deduct losses up to the amount she is considered at risk, which in this case is $7,000. Therefore, Sue can deduct $7,000 and the remaining $2,000 loss is suspended until she has sufficient at-risk basis to absorb it.

The correct answer is B. $2,000 disallowed because of her at-risk amount, as that is the excess of her share of the partnership loss over her at-risk amount.