Question

Farell is a member of Sierra Vista LLC. Although Sierra Vista is involved in a number of different business ventures, it is not currently involved in real estate either as an investor or as a developer. On January 1, year 1, Farell has a $100,000 tax basis in his LLC interest that includes his $90,000 share of Sierra Vista’s general debt obligations. By the end of the year, Farell’s share of Sierra Vista’s general debt obligations has increased to $100,000. Because of the time he spends in other endeavors, Farell does not materially participate in Sierra Vista. His share of the Sierra Vista losses for year 1 is $120,000. As a partner in the Riverwoods Partnership, he also has year 1, Schedule K-1 passive income of $5,000. Farell is single and has no other sources of business income or loss

Determine how much of the Sierra Vista loss he will ultimately be able to deduct on his tax return for year 1.

List the losses suspended due to tax-basis, at-risk, and passive activity loss limitations.

Determine how much of the Sierra Vista loss he will ultimately be able to deduct on his tax return for year 1.

List the losses suspended due to tax-basis, at-risk, and passive activity loss limitations.

Assuming Farell is deemed to be an active participant in Sierra Vista and he has a $260,000 loss from a sole proprietorship, determine how much total trade or business loss Farell will deduct on his return in year 1.

Assuming Farell is deemed to be an active participant in Sierra Vista and he has a $260,000 loss from a sole proprietorship, determine how much total trade or business loss Farell will deduct on his return in year 1.

Answer 1

Answers: -

a.)

Farrell may only deduct $5,000 currently, and he will have a $10,000 loss suspended by the tax basis limitation, a $100,000 loss suspended by the at-risk limitation, and a $5,000 loss suspended under the passive activity limitation as illustrated in the table below:

Description	Tax Basis Limitation	At-risk Limitation	Passive Activity Limitation	Explanation
(1) Beginning Tax basis and At-risk amount	$100,000	$10,000		General debt obligations of LLCs are treated as nonrecourse debt. Thus, Farrell’s beginning at-risk amount is $90,000 less than his beginning tax basis.
(2) Increase in nonrecourse debt	$10,000	$0		Non-recourse debt increases by $100,000 - $90,000. Nonrecourse debt not included in at-risk amount.
(3) Tax basis and At-risk amount before ordinary business loss	$110,000	$10,000		(1) + (2)
(4) Ordinary business loss	($120,000)
(5) Loss clearing the Tax basis hurdle	($110,000)			Loss limited to $110,000 tax basis
(6) Loss suspended by Tax basis hurdle	($10,000)			(4) - (5)
(7) Loss clearing Tax basis hurdle		($110,000)		(5)
(8) Loss clearing At-risk hurdle		($10,000)		Loss limited to $10,000 at-risk amount
(9) Loss suspended by At-risk hurdle		($100,000)		(7) - (8)
(10) Passive activity loss			($10,000)	(8) Farrell is not a material participant
(11) Passive income			$5,000	From Riverwoods Partnership
(12) Loss used to offset Passive income			($5,000)	Loss only used to the extent of passive income
(13) Passive activity loss carryover			($5,000)	(10) – (12)

b.)

Farrell may only deduct $10,000 currently, and he will have a $10,000 loss suspended by the tax basis limitation, and a $100,000 loss suspended by the at-risk limitation as illustrated in the table below:

Description	Tax Basis Limitation	At-risk Limitation	Passive Activity Limitation	Explanation
(1) Beginning tax basis and at-risk amount	$100,000	$10,000		General debt obligations of LLCs are treated as nonrecourse debt. Thus, Farrell’s beginning at-risk amount is $90,000 less than his beginning tax basis.
(2) Increase in nonrecourse debt	$10,000	$0		Non-recourse debt increases by $100,000 - $90,000. Nonrecourse debt not included in at-risk amount.
(3) Tax basis and At-risk amount before ordinary business loss	$110,000	$10,000		(1) + (2)
(4) Ordinary business loss	($120,000)
(5) Loss clearing the Tax basis hurdle	($110,000)			Loss limited to $110,000 tax basis
(6) Loss suspended by Tax basis hurdle	($10,000)			(4) – (5)
(7) Loss clearing Tax basis hurdle		($110,000)		(5)
(8) Loss clearing At-risk hurdle		($10,000)		Loss limited to $10,000 at-risk amount
(9) Loss suspended by At-risk hurdle		($100,000)		(7) - (8)
(10) Passive activity loss			($10,000)	(8) Farrell is not a material participant
(11) Passive income			$30,000	From Riverwoods Partnership
(12) Loss used to offset Passive income			($10,000)	Loss used to the extent of passive income
(13) Passive activity loss carryover			$0	(10) – (12)

c.)

Farrell may only deduct $10,000 currently, and he will have a $10,000 loss suspended by the tax basis limitation, and a $100,000 loss suspended by the at-risk limitation as illustrated in the table below:

Description	Tax Basis Limitation	At-risk Limitation	Explanation
(1) Beginning Tax basis and At-risk amount	$100,000	$10,000	General debt obligations of LLCs are treated as nonrecourse debt. Thus, Farrell’s beginning at-risk amount is $90,000 less than his beginning tax basis.
(2) Increase in nonrecourse debt	$10,000	$0	Non recourse debt increases by $100,000 - $90,000. Nonrecourse debt not included in at-risk amount.
(3) Tax basis and At-risk amount before ordinary business loss	$110,000	$10,000	(1) + (2)
(4) Ordinary business loss	($120,000)
(5) Loss Clearing the Tax basis hurdle	($110,000)		Loss limited to $110,000 tax basis
(6) Loss suspended by Tax basis hurdle	($10,000)		(4) - (5)
(7) Loss clearing Tax basis hurdle		($110,000)	(5)
(8) Loss clearing At-risk hurdle and deducted on tax return		($10,000)	Loss limited to $10,000 at-risk amount on line (3). This amount is deducted on Farrell’s return because he is an active participant.
(9) Loss suspended by At-risk hurdle		($100,000)	(7) - (8)