Question

John, a limited partner of candy apple, lp, is allocated $32,500 of ordinary business loss from the partnership. before the loss allocation, his tax basis is $22,500 and his at-risk amount is $12,500. john also has ordinary business income of $22,500 from sweet pea, lp, as a general partner and ordinary business income of $8,300 from red tomato as a limited partner. how much of the $32,500 loss from candy apple can john deduct currently?

Answer 1

John can deduct $12,500 of the $32,500 loss attributed from Candy Apple, LP, which is limited by his at-risk amount. The remaining $20,000 loss can offset his other ordinary business income, resulting in a remaining income of $10,800.

Step-by-step explanation:

The question relates to the tax treatment of a limited partner's ordinary business loss in relation to his tax basis and at-risk amount. John, as a limited partner, is allocated a $32,500 loss from Candy Apple, LP. His initial tax basis is $22,500, and his at-risk amount is $12,500. Losses can only be deducted to the extent of the tax basis and at-risk amount. Therefore, John can first deduct up to his at-risk amount of $12,500. The remaining loss of $20,000 ($32,500 - $12,500) is not currently deductible. However, he can use part of this disallowed loss to offset his ordinary business income from Sweet Pea, LP, and Red Tomato. The remaining ordinary business income after using $20,000 of the loss would be $10,800 ($22,500 + $8,300 - $20,000).