ExpertHard1 markMultiple Choice
CPA · Question 09 · Area I: Individual Compliance and Planning
In Year 1, a taxpayer invests $50,000 in a partnership activity. The taxpayer is a limited partner and does not materially participate. The partnership has no nonrecourse debt. In Year 1, the taxpayer is allocated a loss of $60,000. The taxpayer has no other passive income. How much of the loss is suspended under the at-risk rules and how much under the passive activity loss (PAL) rules?
In Year 1, a taxpayer invests $50,000 in a partnership activity. The taxpayer is a limited partner and does not materially participate. The partnership has no nonrecourse debt. In Year 1, the taxpayer is allocated a loss of $60,000. The taxpayer has no other passive income. How much of the loss is suspended under the at-risk rules and how much under the passive activity loss (PAL) rules?
Answer options:
A.
$0 At-Risk; $60,000 PAL
B.
$10,000 At-Risk; $0 PAL
C.
$10,000 At-Risk; $50,000 PAL
D.
$60,000 At-Risk; $0 PAL
How to approach this question
Apply ordering rules: 1. Basis (not an issue here), 2. At-Risk, 3. Passive Activity. Loss > At-Risk amount is suspended by At-Risk. The portion allowed by At-Risk is then tested against Passive Income.
Full Answer
C.$10,000 At-Risk; $50,000 PAL✓ Correct
C
IRC §465, §469. Total Loss: $60,000. <br/>1. At-Risk Limit: Investment is $50,000. Loss is limited to $50,000. Suspended under At-Risk = $10,000.<br/>2. PAL Limit: The $50,000 allowed by At-Risk is now tested. Since it's a passive activity with no income, the entire $50,000 is suspended under PAL.
Common mistakes
Applying PAL limits before At-Risk limits.
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