ExpertHard1 markMultiple Choice
CPA · Question 12 · Area 1: Individual Tax
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?
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?
Answer options:
A.
$100,000
B.
$130,000
C.
$150,000
D.
$0
How to approach this question
1. Determine Tax Basis: Cash ($100k) + Debt ($50k) = $150k.<br/>2. Determine At-Risk Amount: Cash ($100k) + Recourse Debt ($0) + Qualified Nonrecourse ($0). Total At-Risk = $100,000.<br/>3. Compare Loss ($130,000) to At-Risk ($100,000).<br/>4. Deduction limited to $100,000. Remaining $30,000 suspended under At-Risk rules.
Full Answer
A.$100,000✓ Correct
The taxpayer's tax basis is $150,000 ($100k cash + $50k debt). However, the at-risk amount excludes non-qualified nonrecourse debt. Therefore, the at-risk amount is only $100,000. The loss deduction is limited to the at-risk amount.
Common mistakes
Confusing tax basis (which includes nonrecourse debt) with at-risk basis.
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