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). Because Alfonso’s basis before the loss allocation is $30,000, $10,000 of his $40,000 loss allocation is limited by his tax basis and will carryover to the following year.

b). Of the $30,000 loss not already limited by Alfonso’s tax basis, $6,000 is limited because Alfonso’s at-risk amount is only $24,000 ($30,000 regular tax basis less the $6,000 nonrecourse debt not allowed in calculating the at-risk amount). Thus, $24,000 of loss remains after the tax basis and at-risk limitations, and Alfonso has a $6,000 at-risk carryover.

C). Because Alfonso doesn’t materially participate in the partnership, he may only deduct the $24,000 loss remaining after the tax basis and at-risk limitations to the extent he has passive income from other sources. Thus, he may deduct $1,000 of the $24,000 loss currently and will have a $23,000 passive activity loss carryover