ACC_4301_Solutions_to_Problems_(Chapter_11) - PROBLEMS 33...

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PROBLEMS 33. 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 deducted). 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 34. 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. Sincerely, John J. Jones, CPA Examples 4 and 5 35. 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. Alternative 1 Income Tax cost/ benefit After-tax benefit 9% PV factor Present value
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Year 1 ($30,000) $ 7,500 $ 7,500 0.9434 $ 7,076 Year 2 (30,000) 3,750 1 3,750 0.8900 3,338 Year 3 84,000 (17,250) 2 66,750 0.8396 56,043 Total present value $66,457 Alternative 2 Income Tax cost/ benefit After-tax benefit 9% PV factor Present value Year 1 ($ 50,000) $11,250 3 $11,250 0.9434 $10,613 Year 2 34,000 (7,250) 4 26,750 0.8900 23,808 Year 3 40,000 (10,000) 30,000 0.8396 25,188 Total present value $59,609 1 Because of the at-risk rules, Heather’s tax deduction in year 2 is limited to her remaining at-risk basis of $15,000. The $15,000 loss that is not deductible in year 2
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ACC_4301_Solutions_to_Problems_(Chapter_11) - PROBLEMS 33...

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