Question

At the beginning of 2018, Ms. P purchased a 15 percent interest in PPY Partnership for $21,000. Ms. P's Schedule K-1 reported that her share of PPY's debt at year-end was $15,000, and her share of ordinary loss was $32,850. On January 1, 2019, Ms. P sold her interest to another partner for $2,300 cash a. How much of her share of PPY's loss can Ms. P deduct on her 2018 return? b. Compute Ms. P's recognized gain on sale of her PPY interest c. How would your answers to parts a and b change if PPY were an S corporation instead of a partnership? Complete this question by entering your answers in the tabs below. Required ARequired B Required C Required A How mucn of her share of PPY's loss can Ms. P deduct on her 2018 return? Complete this question by entering your answers in the tabs below. Required ARequired BRequired C Compute Ms. P's recognized gain on sale of her PPY interest in recognized Required A Required BRequired C How would your answers to parts a and b change if PPY were an S corporation instead of a partnership? Deduction Gain recognized

Answer 1

a.

Ms. P’s initial cost basis in her partnership interest	$21,000
Increased by share of partnership debt	$15,000
Decreased by share of ordinary loss	($32,850)
Ms. P’s adjusted basis on January 1, 2019	$3,150

Ms. P can deduct her entire $32,850 share of loss on her 2018 return.

b.

Amount realized on sale ($2,300 cash + $15,000 debt relief)	$17,300
Adjusted basis	-$3,150
Gain recognized on sale of partnership interest	$13,850

c.

Ms. P’s loss deduction would be limited to $21,000. If PPY is an S corporation, her basis does not include any share of the entity’s debts. Her adjusted basis on January 1, 2019 would be zero, and she would have a $2,300 gain on sale of her S corporation stock.