ExpertHard1 markMultiple Choice
CPA · Question 66 · Area V: Entity Taxation
A taxpayer is a 40% partner in a partnership. The partnership has $100,000 of recourse liabilities and $50,000 of nonrecourse liabilities. The taxpayer bears the economic risk of loss for the recourse liabilities. What is the taxpayer's share of liabilities for basis purposes?
A taxpayer is a 40% partner in a partnership. The partnership has $100,000 of recourse liabilities and $50,000 of nonrecourse liabilities. The taxpayer bears the economic risk of loss for the recourse liabilities. What is the taxpayer's share of liabilities for basis purposes?
Answer options:
A.
$60,000
B.
$60,000
C.
$40,000
D.
$20,000
How to approach this question
Recourse Debt: Allocated to partners who bear risk (usually via loss ratio). Nonrecourse Debt: Allocated by profit ratio. 40% of $100k + 40% of $50k = $40k + $20k = $60k.
Full Answer
B.$60,000✓ Correct
B
Recourse liabilities are allocated to the partner who bears the economic risk of loss (typically based on loss sharing ratio). Nonrecourse liabilities are allocated based on profit sharing ratio. 40% x $100,000 = $40,000. 40% x $50,000 = $20,000. Total = $60,000.
Common mistakes
Allocating recourse debt by profit ratio (it's loss ratio/risk).
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