Partner A contributes cash of $10,000 to a partnership in exchange for a 10% interest. In the partnership’s first taxable year, Partner A is allocated $15,000 in losses. In the partnership’s second taxable year, Partner A is allocated $10,000 of income. In the partnership’s third taxable year, Partner A is allocated both a $3,000 capital loss and a $3,000 ordinary loss. Assuming Partner A materially participates in the partnership, to what extent (in terms of both amount and character) will A be allowed to deduct losses in the third taxable year?
A. 
Partner A may only deduct $5,000 of losses in total, but may choose to deduct $3,000 in ordinary losses and $2,000 in capital losses with the remaining $1,000 of capital loss being carried forward. 

B. 
Partner A may only deduct $5,000 of losses in total. Further, Partner A must deduct capital losses before ordinary losses, so $3,000 in capital losses and $2,000 in ordinary losses are allowed with the remaining $1,000 of ordinary loss being carried forward. 

C. 
Partner A may only deduct $5,000 of losses in total: $2,500 in capital losses and $2,500 in ordinary losses. The remaining $500 in capital losses and $500 in ordinary losses are carried forward. 

D. 
Partner A may deduct $3,000 in capital losses and $3,000 in ordinary losses. This is because A materially participates in the partnership, so the passive loss limitations do not apply as a result. 
whenever a partner qualifies the materially participation test, then he is allowed to deduct full amount of loss in their tax return, therefore in the instant given case, here Partner A materially participates in the business therefore he will be allowed to deduct both 3000 capital loss as well as 3000 ordinary loss in his tax return.
therefore answer is Point D i.e. Partner A may deduct $3,000 in capital losses and $3,000 in ordinary losses. This is because A materially participates in the partnership, so the passive loss limitations do not apply as a result.
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