Question

On the first day of the​ partnership's tax​ year, Karen purchases a​ 50% interest in a general partnership for​ $30,000 cash and she materially participates in the operation of the partnership for the entire year. The partnership has​ $40,000 in recourse liabilities when Karen enters the partnership. Partners share the economic risk of loss from recourse liabilities in the same way they share partnership losses. There is no minimum gain related to the nonrecourse liability. During the​ year, the partnership incurs a​ $120,000 loss and a​ $20,000 increase in liabilities. How much of the loss can Karen report on her tax return for the current​ year?

Answer 1

Answer: $60,000

Step-by-step explanation:

Karen purchased a 50% interest in the partnership. This is the proportion that losses and the Liability will be shared in as well.

Begining basis is $30,000.

Then adding 50% of the starting recourse Liability as well as the increase in Liabilities gives,

= (50% * 30,000) + (50% * 20,000) + 30,000 (begining basis)

= $60,000

This means that Karen's AT-RISK basis is $60,000.

She can only record a loss Deductible to the maximum of $60,000.

It just so happens that her losses are,

= 50% * $120,000

= $60,000

She can report a loss of $60,000 because the company made a loss of $120,000 and she owns 50%. It also does not exceed the at-risk basis.