Question

Mom and Pop Partnership had the following results during the taxable year: Income from operations $100,000 loss, Capital gain from sale of land $25,000, Charitable contributions $10,000. Junior, a 50% partner, had an adjusted basis of $40,000 at December 31, without regard to the current year income or loss items. In preparing his individual income tax return, Junior should report which of the following amounts?

Answer 1

Junior should report a $50,000 loss from operations, a $12,500 capital gain, and a $5,000 charitable contribution deduction, reduced by any basis limitations.

Step-by-step explanation:

The student's question revolves around how Junior, a 50% partner in Mom and Pop Partnership, should report his share of income and losses on his individual income tax return. Junior should recognize a $50,000 loss from operations ($100,000 loss multiplied by his 50% partnership interest), a $12,500 capital gain from the sale of land ($25,000 gain multiplied by 50%), and a $5,000 deduction for charitable contributions ($10,000 contributions multiplied by 50%). However, it's important to note that the taxation of partnership income can be complex, and factors such as passive activity loss limitations and basis limitations may affect the deductibility of these amounts. Because Junior's adjusted basis at the end of the year is stated to be $40,000 before accounting for the current year's income or loss, it's crucial to consider whether the reported loss might exceed his basis, which would limit the loss he could recognize on his individual return.