Question

10. Jack, Jill and James own a CPA firm (Smith, Smith, Bond and Co., LLC), which is taxed as a partnership, and where each work full-time. Each contributed cash of $100,000 to the firm in 2019 at its beginning. The firm in the first year made $40,000 in profit in its first year. Profits and losses are split three ways.

The partnership has the following forms of debt: Nonrecourse: $30,000 Recourse: $150,000 (The recourse debt was secured 100% by James) Qualified Nonrecourse Mortgage: $600,000

a. Calculate the total basis (including debt basis) for each partner.

b. Calculate the at-risk amount limitation

c. Calculate the passive loss limitation for each partner.

Answer 1

1.  Nonrecourse liabilities can provide basis for distributions, but generally do not provide basis for purposes of the at-risk rules.

2.Qualified nonrecourse financing generally includes financing for which no one is personally liable for repayment that is borrowed for use in an activity of holding real property and that is loaned or guaranteed by a federal, state or local government or that is borrowed from a “qualified” person.  

3. Recourse liabilities are those that any partner bears the economic risk of loss with respect to the liability.  Recourse liabilities can provide basis for distributions and can also generate basis for purposes of the at-risk rules.

4.At risk rules are tax laws limiting the amount of losses an investor (such as a limited partner) can claim. Only the amount actually at risk can be deducted.