Question

Rosa contributes $50,000 to a business entity in exchange for a 10% ownership interest. Rosa materially participates in the entity. The business entity incurs a loss of $900,000 for the current tax year and holds liabilities at the end of the year of $700,000. Of this amount, $150,000 is recourse debt and $550,000 is nonrecourse debt.

If an amount is zero, enter "0".

a. Assume that the business entity is a partnership.

How much of the entity loss can Rosa deduct on her the current tax year income tax return?
$________

What is her basis for the partnership interest at the end of the current tax year?
$__________

b. Assume that the business entity is a C corporation.

How much of the entity loss can Rosa deduct on her the current tax year income tax return?
$_________

What is her basis for the stock at the end of the current tax year?
$________

Answer 1

Q.A: How much of Rosa’s share of the loss can she deduct for the year on her individual tax return?

Answer:

Rosa can claim $ 90,000 (being 10% of $900,000) share of loss on her individual tax return

Q. A1: What is Rosa’s basis for her partnership interest at the end of the year?

Answer:

Given in the question is that Rosa has contributed $ 50,000 to FlipCo in exchange for a 10% ownership interest. This basis is good enough to allow her a 10% partnership interest in FlipCo at the end of the year

B: What is Rosa’s basis for her stock at the end of the year?

Answer:

Rosa had contributed $ 50,000 to FlipCo for a 10% interest. Loss made at the end of the year by FlipCo is $900,000, 10% of which is Rosa’s share. So he next capital value of her stock is

Capital brought in for 10% partnership         A         $ 50,000

Loss at end of year                                                B         ($90,000)

Capital (stock value) at end of year                  A-B     ($40,000)