Partners A, B, C and D each contribute $100,000 for 25% of the ABCD partnership. The...

Partners A, B, C and D each contribute $100,000 for 25% of the ABCD partnership.
The partners all meet the three tests for economic effect, and the four tests for allocation of nonrecourse deductions are met as well.
They use the $400,000 cash and $3,600,000 of nonrecourse financing to buy a building that is depreciable over 20 years on a straight line basis.
Income equals expenses in all years, except for depreciation, which is allocated completely to D.
How much of the depreciation deduction in each year (from year 1 to year 3) will D be allowed to take?

Expert Solution

Answer -

Depreciation per year = [($400000+$3600000) / 20 years] = $200000.

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Determination of Depreciation Deduction in each year

	Amount of depreciation deduction "D" is allowed to take	Explanation
Year 1	$200000	The depreciation of $200000 in year 1 will be allocated to D, even though it gives him a negative capital account of -$100000 (that is $100000 - $200000). Since he is required to make up this amount, the allocation has economic effect
Year 2	$200000	The depreciation of $200000 in year 2 will reduce D’s capital account to -$300000 (that is -$100000 - $200000) which still has economic effect.
Year 3	$200000	The $200000 of depreciation in year 3 would not have economic effect, since the other partners’ positive capital account balances are only $300000 (that is $100000 + $100000 + $100000) and any deficit account make-up beyond that by D would presumably be returned to him.

ekkarill92 answered 1 year ago

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