Question

For the tax year, ABC partnership reported $68,000 ordinary loss and $30,000 increase in recourse liabilities for which the partnership are liable. Anne a 50% owner, had an adjusted basis of $20,000 at the beginning of the year. What is Anne's allowable loss and he adjusted basis in ABC at the end of the year?  

a) Allowable loss $19,000, Adjusted basis $1,000

b) Allowable loss $20,000, Adjusted basis $0

c) Allowable loss $34,000, Adjusted basis $0

d) Allowable loss $34,000, Adjusted basis $1,000.

I had a study question which I got correct that indicates that the answer should be Allowable loss $20,000, Adjusted basis $0.

Can someone please answer and explain how they arrived at their answer.

Thank you.

Answer 1

Increase in recourse liabilities is to be reduced from the partnership basis, in this case the increase in recourse liabilities is $30,000. Share of Anne is 50%. Hence, it is $30,000*50% =$15,000.

Given adjusted basis in this case =$20,000.

Current year loss =$68,000.

Share of Annies loss =$68,000*50%

=$34,000.

Adjusted basis = Year beginning basis+ share in recourse liabilities.- Loss for the current year

=$20,000+$30,000*50%

=$35,000.

Adjustement due to increase in recourse liabilities after loss =$35,000 -$34,000

=$1,000.

Therefore, answer is option 4. ie., Allowable loss =$34,000 and adjusted basis =$1,000.