In 2005 Russell acquired and interest iin a partnership in which he is not a material participant. The partnership was profitable through 2008, and Russell's basis in partnership interest at the beginning of 2009 was $50,000. Russell's share of the partnership loss was $40,000 in 2009, and his share of partnership income is $22,000 in 2010. How much can Russell deduct for 2009 and 2010?

Question

In 2005 Russell acquired and interest iin a partnership in which he is not a material participant. The partnership was profitable through 2008, and Russell's basis in partnership interest at the beginning of 2009 was $50,000. Russell's share of the partnership loss was $40,000 in 2009, and his share of partnership income is $22,000 in 2010. How much can Russell deduct for 2009 and 2010?

Answer 1

To determine how much Russell can deduct for 2009 and 2010, we need to follow the rules and guidelines set by the Internal Revenue Service (IRS).

First, let's calculate Russell's basis in the partnership interest at the end of 2009. To do this, we start with his beginning basis of $50,000 and then subtract any losses allocated to Russell during the year. In 2009, Russell's share of the partnership loss was $40,000. Therefore, his adjusted basis at the end of 2009 is $50,000 - $40,000 = $10,000.

Now, let's move on to 2010. We'll need to consider Russell's adjusted basis at the beginning of the year, any loss allocated, and any income allocated during that year.

Since Russell's adjusted basis at the beginning of 2010 is $10,000 and his share of partnership income for 2010 is $22,000, we have two possible scenarios:

Scenario 1: The basis limitation applies - If a partner's losses exceed their adjusted basis in the partnership, the partner's deductible loss is limited to their adjusted basis. In this case, Russell's adjusted basis of $10,000 is less than the $40,000 loss allocated to him in 2009. Therefore, he can only deduct up to his adjusted basis of $10,000 for 2009.

Scenario 2: The basis limitation does not apply - If a partner's losses do not exceed their adjusted basis in the partnership, they can deduct the entire loss. In this scenario, since Russell's adjusted basis is higher than the loss allocated to him in 2010 ($10,000 > $0), he can deduct the full $22,000 for 2010.

So, in summary, Russell can deduct $10,000 for 2009 and $22,000 for 2010, given the provided information and depending on whether the basis limitation applies in each year.