Question

Clint noticed that the Schedule K-1 he just received from ABC Partnership included a $20,000 ordinary business loss allocation. His tax basis in ABC at the beginning of ABC's most recent tax year was $10,000. Comparing the Schedule K-1 he recently received from ABC with the Schedule K-1 he received from ABC last year, Clint noted that his share of ABC partnership debt changed as follows: recourse debt increased from $0 to $2,000, qualified nonrecourse debt increased from $0 to $3,000, and nonrecourse debt increased from $0 to $3,000.

Finally, the Schedule K-1 Clint recently received from ABC reflected a $1,000 cash contribution he made to ABC during the year.

Clint is not a material participant in ABC partnership, and he received $10,000 of passive income from another investment during the same year he received the loss allocation from ABC. How much of the $20,000 loss from ABC can Clint deduct currently, and how much of the loss is suspended because of the:

1. tax basis
2. the at-risk
3. the passive activity loss limitations?

Answer 1

Basis Limits

Generally your deductions cannot exceed your basis. Basis is more or less the amount you have invested in an activity. You cannot deduct losses once your basis reaches zero because you cannot lose more than you invested in the first place.

At-Risk Limits

Generally, your deductions cannot exceed the amount you have at risk. Roughly, an amount at risk is an amount you invested and could lose. An amount not at risk exists when there is a part of your investment basis that you are protected from losing.

Passive activity Limits

Generally, you cannot deduct expenses from a passive activity against income that is not from a passive activity.

A passive activity is:

• a trade or business activity in which you do not materially participate during the year.
• a rental activity, even if you do materially participate, unless you are a real estate professional.

Clint cannot deduct any loss from ABC co.