Question

Jay has a tax basis of $34,000 in his partnership interest at the beginning of the partnership tax year. The following amounts of partnership debt were allocated to Jay and are included in his beginning-of-the-year tax basis: (1) recourse debt—$23,000, (2) qualified nonrecourse debt—$1,000, and (3) nonrecourse debt—$2,500. There were no changes to the debt allocated to Jay during the tax year. If Jay is allocated a $35,000 loss for the current year, how much of the loss will be suspended under the tax basis and at-risk limitations?

Multiple Choice

a) $2,500, $1,000

b) $1,000, $2,500

c) $0, $0

d) $34,000, $1,000

Answer 1

Option B is the correct answer

Under tax basis $1,000 is deducted and at-risk limitations $2,500 is suspended. Jay would first apply the loss against his tax basis. Since his tax basis is only $34,000, $1,000 of his $35,000 loss is suspended due to the tax basis limitation. Because Jay's at-risk amount is only $31,500 (34,000 - 2,500) , an additional amount of $2,500 of Jay's remaining $34,000 loss is suspended because of the at-risk limitation leaving Jay with only $31,500 of loss that he could deduct currently.

Therefore, Option B $1,000 , $2,500 is the right answer.