Question

Darin has a tax basis of $7,000 and an at-risk amount of $5,000 in a partnership where he is a 25% owner. The partnership incurred a loss of $40,000 in the current year. How much of the loss will be allocated to Darin and how much will he be able to deduct in the current year assuming he materially participates in the business?

$10,000 of the loss will flow-through to Darin, and he will be able to deduct $5,000.


$40,000 of the loss will flow-through to Darin, and he will be able to deduct $10,000.


$10,000 of the loss will flow-through to Darin, and he will be able to deduct $7,000.


$10,000 of the loss will flow-through to Darin, and he will be able to deduct $10,000.

Answer 1

Darin will have $10,000 of the partnership loss allocated to him as he owns 25% of the partnership. However, he can only deduct up to his at-risk amount of $5,000 in the current year, regardless of his tax basis.

Step-by-step explanation:

The student is asking how much of the partnership loss will be allocated to Darin, a 25% owner, and how much he will be able to deduct on his current year tax return, given his tax basis and at-risk amount in the partnership.

Darin's share of the partnership's $40,000 loss would be 25%, which amounts to $10,000.

However, Darin can only deduct losses up to the at-risk amount, which is $5,000. Therefore, the loss allocated to Darin is $10,000, but he will only be able to deduct $5,000 in the current year.