Question 1

A taxpayer invests $100,000 in a partnership activity. The debt structure of the partnership allocates $50,000 of nonrecourse debt to the taxpayer. The taxpayer is not personally liable for this debt, and it is not qualified nonrecourse financing. In Year 1, the partnership allocates a loss of $130,000 to the taxpayer. What is the taxpayer's deductible loss under the At-Risk rules?

Accepted Answer

1. Determine Tax Basis: Cash ($100k) + Debt ($50k) = $150k.
2. Determine At-Risk Amount: Cash ($100k) + Recourse Debt ($0) + Qualified Nonrecourse ($0). Total At-Risk = $100,000.
3. Compare Loss ($130,000) to At-Risk ($100,000).
4. Deduction limited to $100,000. Remaining $30,000 suspended under At-Risk rules.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Confusing tax basis (which includes nonrecourse debt) with at-risk basis.

How to approach this question

Full Answer

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