Marian owns 40% of Addison Company, a partnership. Marian's adjusted basis in the partnership is $32,000 at the beginning of the year. During the current year, Marian receives a $10,000 cash distribution from the partnership. Addison Company reports a $100,000 operating loss for the current year. If Marian is not a material participant in Addison Company and has no other passive activities, how much of the partnership loss can she deduct on her income tax return?
A)$-0-
B)$10,000
C)$22,000
D)$40,000

Question

Quizplus · Accepted Answer

As Marian is not a material participant in Addison Company and has no other passive activities, she cannot deduct any of the partnership loss on her income tax return. Furthermore, her adjusted basis in the partnership is reduced by the cash distribution she received, but she cannot deduct any loss in excess of her basis. Since her basis is $32,000 and the partnership loss is $100,000, Marian's share of the loss that she can deduct is limited to $12,800 (40% of $32,000). Therefore, she cannot deduct any of the partnership loss and her taxable income for the year is not affected by the operating loss of the partnership.

Marian Owns 40% of Addison Company, a Partnership