Final answer:
Ashley's allowable loss is limited to her initial investment in the OSH partnership, which is $15,000, and her adjusted basis becomes $0 after accounting for her share of the loss. The recourse liabilities increase her initial basis, but after the loss is applied, the result is an adjusted basis of $0.
Step-by-step explanation:
The student's question involves calculating Ashley's allowable loss and her adjusted basis in the OSH partnership at the end of the tax year. Ashley is a 50% partner in the OSH partnership, which reported a $74,000 ordinary loss and a $28,000 increase in recourse liabilities.
First, we assess the impact of the partnership's loss on Ashley's initial basis of $15,000. Ashley's share of the ordinary loss would be 50% of $74,000, which amounts to $37,000. However, losses can only be claimed up to the extent of the individual partner's basis in the partnership. Therefore, Ashley's allowable loss would be limited to her starting adjusted basis of $15,000, since she cannot claim a loss that exceeds her investment in the partnership prior to considering any additional liabilities.
The increase in recourse liabilities is shared among the partners according to their partnership percentages. Thus, Ashley's share is 50% of $28,000, which equals $14,000. This increase in liabilities would effectively increase her basis by the same amount. Adding this to her initial basis of $15,000, we get $29,000. After accounting for her allowable loss of $15,000, Ashley's adjusted basis at the end of the year would be $14,000 ($29,000 - $15,000).
According to these calculations, the correct answer to the student's question is Option B: Allowable loss: $15,000. Adjusted basis: $0. The adjusted basis is reduced to $0 because Ashley has claimed the entirety of her basis as a loss.