Question

Edward is a partner in ENS, Ltd. The partnership generated a loss during the current year. Edward's share of the loss was $7,000. How should Edward handle the loss for tax purposes assuming there are no basis, at-risk, or passive loss limitations?

A) Edward can deduct $7,000 from AGI.
B) Edward can deduct $7,000 for AGI.
C) Edward can deduct $3,000 for AGI and carryforward the remaining loss.
D) Edward does NOT report the loss because it will be reported on the partnership tax return.

Answer 1

Edward can deduct his $7,000 share of the partnership's loss for Adjusted Gross Income (AGI), which helps reduce his taxable income and potentially his overall tax liability for the year.

Step-by-step explanation:

For tax purposes, when a partnership generates a loss, the individual partner's tax treatment of the loss generally depends on the partner's tax basis in the partnership, any at-risk limitations, and passive activity loss rules. However, since the question assumes there are no basis, at-risk, or passive loss limitations, the treatment is straightforward. Edward can deduct his share of the partnership's loss on his tax return.

The appropriate option for Edward is:
B) Edward can deduct $7,000 for AGI.

Adjusted Gross Income (AGI) is an important figure on the tax return. It represents the total income less certain adjustments, including the deductible share of partnership losses. By deducting the $7,000 from his AGI, Edward can lower his taxable income accordingly, which may help reduce his overall tax liability for the year.