Rinaldo owns 20% of Mahoney Company, a partnership. Rinaldo's adjusted basis in the partnership is $32,000 at the beginning of the current year. During the current year, Rinaldo receives a $10,000 cash distribution from the partnership. Mahoney Company reports a $200,000 operating loss for the current year. Which of the following statements is/are correct?
I.Rinaldo's maximum loss deduction is limited to $22,000.
II.If Rinaldo is a material participant in Mahoney, he can deduct a $40,000 loss.

A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Question

Rinaldo owns 20% of Mahoney Company, a partnership. Rinaldo's adjusted basis in the partnership is $32,000 at the beginning of the current year. During the current year, Rinaldo receives a $10,000 cash distribution from the partnership. Mahoney Company reports a $200,000 operating loss for the current year. Which of the following statements is/are correct?
I.Rinaldo's maximum loss deduction is limited to $22,000.
II.If Rinaldo is a material participant in Mahoney, he can deduct a $40,000 loss.
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A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Quizplus · Accepted Answer

Statement I is correct because Rinaldo's maximum loss deduction is limited to his adjusted basis in the partnership, which is $32,000, minus any cash distributions received during the year. In this case, Rinaldo received a $10,000 cash distribution, so his maximum loss deduction is $22,000 ($32,000 - $10,000).

Statement II is incorrect because material participation rules apply to passive activity losses, which do not include losses from a partnership in which the taxpayer materially participates. Therefore, Rinaldo's ability to deduct the loss is determined solely by the partnership basis rules, not by the material participation rules.

Rinaldo Owns 20% of Mahoney Company, a Partnership