Question

Darlene has a tax basis and at-risk basis of $10,000 in a partnership where she is a 50% owner. Darlene materially participates in the operations of the business. The partnership incurred a loss of $35,000 in the current year. How much of the loss will be allocated to Darlene and how much will she be able to deduct in the current year?

(a) $10,000 of the loss will flow-through to Darlene, and she will be able to deduct $10,000.

(b) $35,000 of the loss will flow-through to Darlene, and she will be able to deduct $17,500.

(c) $17,500 of the loss will flow-through to Darlene, and she will be able to deduct $10,000.

(d) $35,000 of the loss will flow-through to Darlene, and she will be able to deduct $10,000.

Answer 1

Darlene will be allocated 50% of the partnership loss, which amounts to $17,500. However, due to tax basis and at-risk basis limitations, she can only deduct up to $10,000 of the loss in the current year.

Step-by-step explanation:

When a partnership incurs losses, those losses are typically allocated to the partners based on their ownership percentages, unless there's an agreement that states otherwise. In this case, Darlene is a 50% owner in the partnership, which means she would normally be allocated 50% of the partnership losses.

However, there are limitations on loss deductions based on the tax basis and at-risk rules. The tax basis limits the deductible loss to the extent of the partner's investment in the partnership. Similarly, the at-risk basis limits the loss deductible to the amount the partner has at risk in the activity.

Given that Darlene's tax basis and at-risk basis are both $10,000, even though her share of the partnership loss would be $17,500 (50% of $35,000), she can only deduct up to her basis, which is $10,000.

Therefore, the correct answer to the question is: (c) $17,500 of the loss will flow-through to Darlene, and she will be able to deduct $10,000.