The at-risk rules limit Fred’s deductions.
He can deduct $35,000 in 2008, thereby
reducing his at-risk amount to $15,000 ($50,000 original investment – $35,000
He will be limited to a $15,000 deduction in 2009 unless he increases his
amount at risk.
Fred’s share of the partnership losses is not subject to the passive loss
restrictions because his interest is not a passive activity.
Examples 4 and 5
Hoffman, Smith, and Willis, CPAs
5191 Natorp Boulevard
Mason, OH 45040
February 6, 2009
Mr. Bill Parker
54 Oak Drive
St. Paul, MN 55162
Dear Mr. Parker:
This letter is in response to your inquiry regarding the tax treatment of losses that you
could expect this year and next year from an investment in Best Choice Partnership. As I
understand the facts, you would invest $60,000 in the partnership with the expectation
that your share of the partnership losses in the current and succeeding years would be
$40,000 and $25,000, respectively.
Even though your investment would not be subject to the passive activity limitations, the
amount of the deduction that you may claim in any one year is subject to the at-risk rules.
Essentially, these rules provide that your deductions are limited to the amount that you
have invested in the venture or the amount that you could lose if the investment were to
be unsuccessful. Consequently, in your case, the initial amount that you would have at
risk would be $60,000. Therefore, you would be able to deduct $40,000 in the current
year, which would cause your at-risk basis to be reduced to $20,000 ($60,000 – $40,000).
Because your at-risk basis at the end of next year would be only $20,000, your share of
the partnership loss that would be deductible would be limited to $20,000. The amount
not deducted under this scenario would be deductible later when your at-risk basis
increases, for example, by additional investments you may make in the partnership or
because of income generated by the partnership.
If you have additional questions or need further clarification, please call me.
John J. Jones, CPA
Examples 4 and 5
Based on the following, Alternative 1’s benefit exceeds Alternative 2’s by $6,848
($66,457 – $59,609), primarily because of the flow of the benefits and the effect of the at-
risk rules on those benefits.