Question

At the beginning of 2022, Ms. Pope purchased a 15 percent interest in PPY Partnership for $25,000. Ms. Pope’s Schedule K-1 reported that her share of PPY’s debt at year-end was $28,000, and her share of ordinary loss was $49,250. On January 1, 2023, Ms. Pope sold her interest to another partner for $3,600 cash.

How much of her share of PPY’s loss can Ms. Pope deduct on her 2022 return?

Answer 1

Ms. Pope can deduct her entire share of the PPY Partnership's ordinary loss of $49,250 on her 2022 return since it is less than her adjusted basis of $53,000 in the partnership at the end of 2022.

Step-by-step explanation:

The question relates to how much of a partnership loss is deductible by a partner in the year of disposition. In 2022, Ms. Pope’s share of PPY Partnership’s ordinary loss was $49,250. However, Ms. Pope can only deduct losses to the extent of her adjusted basis in the partnership at the end of the year.

Ms. Pope's initial investment was $25,000, and her share of PPY’s debt, which increases her basis, was $28,000. Therefore, her adjusted basis before factoring the loss would be $25,000 + $28,000 = $53,000. Since the loss ($49,250) is less than her adjusted basis, she can deduct the entire loss amount on her 2022 return.

Upon selling her interest on January 1, 2023, for $3,600 cash, her basis would be adjusted again, but this affects her gains or losses for the year 2023 and is not relevant to the 2022 deductions.