Question

Alfonso began the year with a tax basis in his partnership interest of $30,000. His share of partnership debt at the beginning and end of the year consists of $4,000 of recourse debt and $6,000 of nonrecourse debt. During the year, he was allocated $40,000 of partnership ordinary business loss. Alfonso does not materially participate in this partnership and he has $1,000 of passive income from other sources.

a. How much of Alfonso's loss limited by his tax basis?
b. How much of Alfonso's loss is limited by his at-risk amount?
c. How much of Alfonso's loss is limited by the passive activity loss rules?

Answer 1

a. Given that

Basis before loss allocation $30,000

Loss allocation is $40,000

Thus, $10000 (40000 - 30000) is limited by tax basis and will be carried over to the following year.

b. Amount not at risk does not include non recourse financing that limits the losses of taxpayers. Thus, of the $30000 not already limited by Alfonso tax basis, $24000 is at risk amount only ( 30000 - 6000 nonrecourse debt). Therefore, amount remaining after tax basis and at risk limitations is $24,000 and then $6000 at risk carryover.

c. $23,000 passive activity loss carryover as a result of $1000 passive income from other sources deducted from the $24000 loss remaining after tax basis and at risk limitations (24000 - 1000).

Answer 2

a. Loss limited by his tax basis $10,000

Share of loss $40,000

less: Tax Basis $30,000

Loss limited by $10,000

This means that $10,000 is limited by tax basis and will be carried over to the following year.

b. Loss limited by at-risk amount $6,000

We need to compute at-risk amount.

At-risk amount

= Tax basis - nonrecourse

= $30,000 - $6,000

= $24,000

Then,

At risk limitation

= At-risk amount - share of loss

= $ 24,000 - $40,000

= $16,000

Therefore,

loss limited at risk amount

= At risk limitation - the loss already limited by tax basis

= $16,000 - $10,000

= $6,000

c. Loss limited by passive activity loss rules $23,000

= At-risk amount limitation - passive income

= $24,000 - $1,000

= $23,000

It therefore means that $23,000 passive activity loss is carryover as a result of $1,000 passive income from other sources deducted from the $24,000 loss balance after taking into consideration tax basis and at risk limitations.