On the first day of the partnership's tax year, Karen purchases a 50% interest in a general partnership for $30,000 cash and she materially participates in the operation of the partnership for the entire year. The partnership has $40,000 in recourse liabilities when Karen enters the partnership. Partners share the economic risk of loss from recourse liabilities in the same way they share partnership losses. There is no minimum gain related to the nonrecourse liability. During the year, the partnership incurs a $120,000 loss and a $20,000 increase in liabilities. How much of the loss can Karen report on her tax return for the current year?
A)$30,000
B)$40,000
C)$50,000
D)$60,000

Question

Quizplus · Accepted Answer

Karen purchased a 50% interest in a general partnership. Therefore, she is entitled to report 50% of the partnership's losses on her tax return.

The partnership incurred a $120,000 loss during the year. Karen's share of the loss is 50% x $120,000 = $60,000.

Additionally, the partnership had a $20,000 increase in liabilities during the year. Since partners share the economic risk of loss from recourse liabilities in the same way they share partnership losses, Karen's share of the liability increase is also 50%. Therefore, Karen's share of the liability increase is 50% x $20,000 = $10,000.

In total, Karen can report a loss of $60,000 - $10,000 = $50,000 on her tax return for the current year.

On the First Day of the Partnership's Tax Year, Karen