Question

Mutt and Jeff each have a 50% interest in Keni Partnership. The partnership and the individuals file on a calendar-year basis. For its Year 4 tax year, Keni had a $30,000 loss. Mutt's adjusted basis in the partnership interest on January 1, Year 4, was $8,000. In Year 5, Keni partnership had a profit of $28,000. Assuming that there were no other adjustments to Mutt's basis in the partnership in Year 4 and Year 5, what amount of partnership income (loss) would Mutt show on his Year 4 and Year 5 individual income tax returns

Answer 1

A partner's distributive share of partnership loss is allowed only to the extent of the adjusted basis of the partner's partnership interest:

Computation:

Year 4 Year 5

Mutt's share of profit(loss) at 50% ($15,000) $14,000

Basis 8,000 0

Unallowed loss (carryover) ($ 7,000) ($ 7,000)

Taxable income(loss) allowed ($ 8,000) $ 7,000