at_risk_limits_solution - Jim can only deduct $10,000 of...

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Topic: The at-risk rules [Solution] During 2009 Jim invests $10,000 in a partnership and receives a 40% interest. The partnership borrows $400,000 on a nonrecourse basis. Jim's basis in the partnership is $170,000 [$10,000 + (40% x $400,000)]. Jim's @ risk amount is $10,000. The partnership buys and leases equipment. Jim materially participates in the business. During the first year, the rental revenue is $70,000, depreciation is $40,000, interest expense is $35,000 and other expenses are $25,000. Required : How much of the loss can Jim deduct in 2009? How much is suspended under the at-risk limitations? The ordinary partnership loss of $30,000 is computed as follows: Rental revenue 70,000 Interest expense (35,000) Other expenses (25,000) Depreciation (40,000) Partnership profit (loss) (30,000) Jim's share of the loss is $12,000 (40% x $30,000).
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Unformatted text preview: Jim can only deduct $10,000 of loss because he is at-risk for only $10,000. $2,000 is suspended under the at-risk limitations. Jim can deduct no future losses until he restores his at risk amount by investing additional capital in the partnership or by increasing partnership debt (or the easiest way to restores his at-risk amount is by turning the business around and reporting profit). In reality, what the rule says is that because he is not liable for the debt that is creating the basis in the equipment; his deduction for the depreciation that the debt is generating is limited. He could walk away from the partnership without any obligation to pay the partnership's nonrecourse debt. The at-risk rule limits how much depreciation Jim can deduct but not other expenses which are paid for or for which he is personally liable....
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