At the beginning of the tax year, Zach's basis for his partnership interest and his amount at risk in the partnership was $30,000. His share of partnership items for the year consisted of tax-exempt interest income of $2,000 and an ordinary loss of $44,000. He also received a distribution of $20,000 cash from the partnership during the year. He is an active general partner and has no passive income or business losses from other sources. For the tax year, Zach will report:
A) A nontaxable distribution of $20,000, an ordinary loss of $10,000, and a suspended loss carryforward of $34,000.
B) An ordinary loss of $32,000, a suspended loss carryforward of $12,000, and a taxable distribution of $20,000.
C) A nontaxable distribution of $20,000, an ordinary loss of $12,000, and a suspended loss carryforward of $32,000.
D) An ordinary loss of $44,000 and a nontaxable distribution of $20,000.

Question

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Zach's basis starts at $30,000. The tax-exempt interest income of $2,000 increases his basis to $32,000. He can deduct losses up to his basis, so he can deduct $32,000 of the $44,000 loss, leaving a suspended loss of $12,000. The $20,000 cash distribution does not affect his taxable income because distributions reduce the partner's basis in the partnership and are not taxable as long as the distribution does not exceed the partner's adjusted basis in the partnership before the distribution. Therefore, Zach will report a nontaxable distribution of $20,000, an ordinary loss of $12,000 (the amount up to his adjusted basis), and a suspended loss carryforward of $32,000 (the remaining loss).

At the Beginning of the Tax Year, Zach's Basis for His