Basis Limitation for Lincoln's Loss. Let's reset our facts with one change. Suppose that F&L generated a loss of $(400,000) for 2020 instead. Lincoln's beginning basis for 2021 is $150,000.

i. How does a loss affect a taxpayer's basis in a partnership? (See IRC 705)

ii. Does Lincoln's original basis in his partnership interest permit him to deduct the full ($200,000) loss? (i.e. may Lincoln's basis go below zero)? (See IRC 705)

iii. Suppose that the partnership borrowed $100,000 from the Bank and that the loan is a non-recourse loan at the beginning of the year?

iv. What is Lincoln's basis beginning basis without the loss? (See IRC 705 & 752)

v. Does Lincoln's basis after the non-recourse loan permit him to deduct the loss? (IRC 705)

c. Lincoln Puts His Money Where His Mouth Is: "At-Risk" Limitation for Lincoln's Loss. Let's keep our facts from item "b." F&L generated a loss of $(400,000) for 2021. Lincoln's beginning basis for 2021 is $150,000. The partnership borrows a $100,000 non-recourse loan from a bank.

i. How much does Lincoln have "At-Risk" before borrowing the non-recourse loan from the bank?

ii. How does the non-recourse loan affect Lincoln's "At-Risk" amount?

iii. Does Lincoln's "At-Risk" amount permit him to deduct the entire loss of ($200,000)?

iv. How does your answer change above if the partnership borrowed a "recourse" loan?

d. Passive Activity Limitation for Lincoln's Loss. Let's keep our facts from item "(c)(iv)." F&L generated a loss of $(400,000) for 2021. Lincoln's beginning basis for 2021 is $150,000. The partnership borrows a $100,000 recourse loan from a bank.

i. Suppose that Lincoln does "materially participates" in the partnership. Do the passive activity rules prevent Lincoln's loss? [See IRC 469(a) through (c)]

1. What is Lincoln's adjusted gross income if he takes the $200,000 allocable loss? What tax effect does deducting losses on a return have on your salary and other income items?

ii. Suppose that Lincoln does not "materially participate" in the partnership. Do the passive activity rules permit him to take the loss? [See IRC 469(a) through (c)]

e. Using Time as a Measuring Stick for Passive Activity Loss Limitations. Assume no individual earns income under IRC 911(i.e. foreign income/income abroad).

i. Suppose that Lincoln spends 553 hours during 2021 working in F&L partnership. Has Lincoln materially participated? [See Treas. Regs. 1.469-1T(c)(10) and 1.469-5T]

ii. Suppose that Lincoln spends only 197 hours during 2021 working in F&L partnership. In addition, his co-owner Frank has worked 300 hours in the business during the year. Has Lincoln materially participated? [See Treas. Regs. 1.469-1T(c)(10) and 1.469-5T]

iii. Suppose that Lincoln spends only 197 hours during 2021 working in F&L partnership. In addition, his co-owner Frank has worked 196 hours in the business during the year. [See Treas. Regs. 1.469- 1T(c)(10) and 1.469-5T]

f. Effect Lincoln's Passive Income on Passive Losses. Suppose that F&L generated a loss of $(400,000) for 2021. Lincoln does not materially participate in F&L. Lincoln's beginning basis for 2021 is $150,000. The partnership borrows a $100,000 recourse loan from a bank. Lincoln has a salary of $200,000. Lincoln has received dividends of $40,000. In addition, Lincoln owns a 25% ownership of R&L partnership which generates $600,000 in ordinary business income.

 

i. If Lincoln does not materially participate in F&L, may he deduct his F&L loss against:

1. His $150,000 Salary? [See IRC 469(d) and (e)(3)].

2. His $40,000 of stock dividends? [IRC 469(d) and (e)(1)(A)(i)(I)]

ii. Suppose that Lincoln does materially participate in R&L partnership (but still no material participation in F&L). May Lincoln deduct the loss against the income from R&L? [See IRC 469 IRC 469(d) and (e) generally]

iii. Suppose that Lincoln does not materially participate in R&L partnership, may he offset the F&L passive activity loss against the R&L income? [See IRC 469 IRC 469(d) and (e) generally]

2. Limitations on Real Estate. Sherry earns $45,000 per year in salary as a biologist at a non-profit organization. Sherry also owns 50% S&U partnership. S&U is a real estate business engaged in rental activity. Sherry is not a real estate professional. S&U generates a $90,000 loss in 2021.

a. Is Sherry's loss passive? May Sherry offset the full S&U loss against her salary? Does it even matter if she materially participates? [See IRC 469(c)(2)]

b. May Sherry deduct some of the S&U loss to offset against her salary if she "actively participates?" How much? [See IRC 469(i)

Answer rating: 100% (QA)

i When a taxpayer incurs a loss in a partnership it can affect the taxpayers basis in the partnership According to IRC 705 a partners basis is increased by the partners contributions to the partnershi... View the full answer