12111 problem page 114 1 does section 704 apply no

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1/21/11 Problem Page 114 (1) Does Section 704 apply? No – the partnership had overall income. Passive loss limitations are not an issue: These are the partner’s only passive activities There is net passive income At-risk limitations: Partner is only at-risk for $10,000 in the R&D activity Even though there is a $12,000 loss, only $10,000 is allowed Net effect: Basis: 30,000 – 12,000 + 25,000 = $53,000 Income: 25,000 – 10,000 = $15,000 net income from activities 26 26
1/21/11 Problem Page 114 (2) A.) B.) C.) D.) 27 27
1/21/11 Limitations on Partnership Losses Passive Loss Limitations Section 469 Applied at the partnership level after Section 704(d) and Section 469 Purpose is to restrict taxpayers from: Using losses from passive investment activities Against income from other sources Income and losses from each passive activity are computed and then combined Loses deductible only to extent of taxpayer’s passive activity income for the year Excess losses are carried forward indefinitely Disallowed losses are deductible in full upon disposition of entire activity 28 28
1/21/11 Limitations on Partnership Losses Passive Loss Limitations Tests for material participation (must meet only one): NUMBER ONE Taxpayer participates more than 500 hours during year NUMBER TWO Taxpayer’s participation is substantially all participation in the activity By any individual for the year NUMBER THREE Taxpayer participates more than 100 hours during year (“significant participation”) His participation is not less than any other person 29 29
1/21/11 Limitations on Partnership Losses Passive Loss Limitations Tests for material participation (must meet only one): NUMBER FIVE Taxpayer materially participated for any 5 of the 10 preceding tax years NUMBER SIX The activity is a “personal service activity” Taxpayer materially participated for any three preceding taxable years NUMBER SEVEN Taxpayer’s participation is regular, continuous, and substantial Limited partnerships Assumed to be limited 30 30

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