David purchased a 10% capital and profits interest in a partnership this year. He does not participate in the partnership's business. David has no passive income in the current year. His distributive share of the partnership's loss is $40,000 for this year. David's Sec. 705 basis in the partnership is $32,000 and his at- risk basis is $16,000 at the end of the current year. How much of the loss can David deduct on his tax return?

Question

Quizplus · Accepted Answer

Since David has no passive income and does not materially participate in the partnership's business, he cannot deduct any losses in excess of his at-risk basis. Therefore, he can only deduct up to his at-risk basis of $16,000 and will carry forward the remaining $24,000 ($40,000 - $16,000) to future years until he has sufficient at-risk basis or income to offset the losses.

David Purchased a 10% Capital and Profits Interest in a Partnership