Question

Partnership Formation, Current Distributions and Guaranteed Payments (LO 10.2, 10.4)

Meredith has a 40 percent interest in the assets and income of the Gantt Partnership, and the basis in her partnership interest is $60,000 at the beginning of 2020. During 2020, the partnership's net loss is $45,000 and Meredith's share of the loss is $18,000. Also, Meredith receives a cash distribution from the partnership of $8,000 on June 30, 2020.
Indicate the amount of income or loss from the partnership that should be reported by Meredith on her 2020 individual income tax return.

Answer 1

Meredith should report a loss of $18,000 from the partnership on her 2020 individual income tax return.

Step-by-step explanation:

Meredith's share of the partnership's net loss of $45,000 is calculated using her percentage interest in the partnership. Since she has a 40 percent interest, her share of the loss is 40% of $45,000, which is $18,000.

However, guaranteed payments and cash distributions are treated separately from a partner's share of partnership income or loss. The $8,000 cash distribution Meredith received is not deductible from her share of the partnership loss.

Therefore, on her 2020 individual income tax return, Meredith should report a loss of $18,000 from the partnership. This loss will reduce her basis in her partnership interest, but any losses in excess of her basis may be deductible in future years.