Bailey owns a 20% interest in a partnership (not involved in real estate)in which his at-risk amount was $25,000 at the beginning of the year.During the year,Bailey receives a distribution of $20,000 from the partnership.The partnership produces an $80,000 loss during the year.If you ignore the passive loss rules,Bailey's deductible loss for the year is:
A)$5,000.
B)$20,000.
C)$25,000.
D)$80,000.

Question

Quizplus · Accepted Answer

Bailey's deductible loss is limited to his at-risk amount in the partnership. At the beginning of the year, his at-risk amount was $25,000. After receiving a $20,000 distribution, his at-risk amount reduces to $5,000 ($25,000 - $20,000). Therefore, Bailey can only deduct $5,000 of the partnership's loss, as that is the remaining amount he is at risk for.

Bailey Owns a 20% Interest in a Partnership (Not Involved