Question

at the beginning of 2021, ms. pope purchased a 20 percent interest in ppy partnership for $20,000. ms. pope’s schedule k-1 reported that her share of ppy’s debt at year-end was $12,000, and her share of ordinary loss was $28,000. on january 1, 2022, ms. pope sold her interest to another partner for $2,000 cash. required: how much of her share of ppy’s loss can ms. pope deduct on her 2021 return? compute ms. pope’s recognized gain on sale of her ppy interest. how would your answers to parts a and b change if ppy were an s corporation instead of a partnership?

Answer 1

Ms. Pope can deduct $20,000 as her share of the loss on her 2021 return. She would recognize a loss of $18,000 on the sale of her interest. If ppy were an S corporation instead of a partnership, the answers to parts a and b would remain largely the same, but the taxation of the gain or loss may vary.

Step-by-step explanation:

To determine how much of Ms. Pope's share of ppy's loss she can deduct on her 2021 return, we need to consider her basis in the partnership. The basis is increased by her share of the partnership's income and decreased by her share of the partnership's losses and withdrawals. In this case, Ms. Pope's share of the ordinary loss is $28,000. However, her basis in the partnership is only $20,000. Therefore, she can deduct only $20,000 as her share of the loss on her 2021 return.

On the sale of her interest in January 2022, Ms. Pope would recognize a gain or loss. The recognized gain is calculated by subtracting her basis in the partnership ($20,000) from the amount realized from the sale ($2,000). In this case, her recognized gain would be a loss of $18,000.

If ppy were an S corporation instead of a partnership, the answers to parts a and b would change. In an S corporation, losses and gains flow through to the shareholders' personal income tax returns. Therefore, Ms. Pope would still need to deduct $20,000 on her 2021 return as her share of the loss. The recognized gain on the sale of her interest would still be $18,000. However, the taxation of the gain or loss may vary for an S corporation compared to a partnership.