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 from the partnership of $20,000 cash during the year. Zach is an active general partner and has no passive income or business losses from other sources. For the tax year, Zach will report:

Question

Quizplus · Accepted Answer

Zach's taxable income or loss from the partnership would be computed as follows:

Tax-Exempt Interest Income  $2,000
Ordinary Loss                     ($44,000)
Total                                           ($42,000)

Since Zach is an active general partner who does not have passive income or business losses from other sources, he is allowed to use up to his entire amount at risk to deduct any losses from the partnership. Therefore, Zach's loss deduction for the current year would be limited to $30,000 (his beginning basis in the partnership), and the remaining loss of $14,000 would be suspended and carried forward to future years.

Zach received a cash distribution of $20,000 during the year, which would not affect his taxable income or loss from the partnership since it did not exceed his basis in the partnership interest.

Therefore, for the tax year, Zach will report a nontaxable distribution of $20,000, an ordinary loss of $12,000 ($30,000 - $2,000 - $20,000), and a suspended loss carryforward of $32,000 ($44,000 - $30,000 - $2,000). Option C is the only choice that matches this result.

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